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GARMIN LTD - Quarter Report: 2018 June (Form 10-Q)

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018

 

or

 

¨

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

 

Commission file number 0-31983

 

 

GARMIN LTD.

(Exact name of Company as specified in its charter)

 

Switzerland

(State or other jurisdiction

of incorporation or organization)

98-0229227

(I.R.S. Employer identification no.)

Mühlentalstrasse 2

8200 Schaffhausen

Switzerland

(Address of principal executive offices)

N/A

(Zip Code)

 

Company's telephone number, including area code: +41 52 630 1600

 

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ      NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  þ    Accelerated Filer ¨     Non-accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨      Emerging growth company  ¨ 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES ¨        NO ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨           NO þ

 

Number of shares outstanding of the registrant’s common shares as of July 30, 2018

CHF 0.10 par value:  198,077,418 (including treasury shares)

 

 

 

 

Garmin Ltd.

Form 10-Q

Quarter Ended June 30, 2018

 

Table of Contents

 

  Page
Part I - Financial Information  
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets at June 30, 2018 and December 30, 2017 (Unaudited) 3
     
  Condensed Consolidated Statements of Income for the 13-weeks and 26-weeks ended June 30, 2018 and July 1, 2017 (Unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Income for the 13-weeks and 26-weeks ended June 30, 2018 and July 1, 2017 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the 26-weeks ended June 30, 2018 and July 1, 2017 (Unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 7
     
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
     
Item 4. Controls and Procedures 32
     
Part II - Other Information  
     
Item 1. Legal Proceedings 33
     
Item 1A. Risk Factors 33
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Defaults Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 34
     
Item 5. Other Information 34
     
Item 6. Exhibits 34
     
Signature Page 35
     
Index to Exhibits 36

 

 2 

 

 

Part I - Financial Information

Item I - Condensed Consolidated Financial Statements

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except per share information)

 

   June 30,   December 30, 
   2018   2017 
Assets          
Current assets:          
Cash and cash equivalents  $946,656   $891,488 
Marketable securities   173,318    161,687 
Accounts receivable, net   533,076    590,882 
Inventories   501,490    517,644 
Deferred costs   31,924    30,525 
Prepaid expenses and other current assets   137,118    153,912 
Total current assets   2,323,582    2,346,138 
           
Property and equipment, net   637,245    595,684 
           
Restricted cash   211    271 
Marketable securities   1,302,447    1,260,033 
Deferred income taxes   188,101    195,981 
Noncurrent deferred costs   30,663    33,029 
Intangible assets, net   409,459    409,801 
Other assets   97,012    107,352 
Total assets  $4,988,720   $4,948,289 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $166,499   $169,640 
Salaries and benefits payable   95,969    102,802 
Accrued warranty costs   38,429    36,827 
Accrued sales program costs   65,477    93,250 
Deferred revenue   98,526    103,140 
Accrued royalty costs   28,209    32,204 
Accrued advertising expense   29,059    30,987 
Other accrued expenses   66,776    93,652 
Income taxes payable   40,016    33,638 
Dividend payable   300,187    95,975 
Total current liabilities   929,147    792,115 
           
Deferred income taxes   74,092    76,612 
Noncurrent income taxes   140,584    138,295 
Noncurrent deferred revenue   84,156    87,060 
Other liabilities   1,860    1,788 
           
Stockholders' equity:          
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 188,797 shares outstanding at June 30, 2018; and 188,189 shares outstanding at December 30, 2017;   17,979    17,979 
Additional paid-in capital   1,828,515    1,828,386 
Treasury stock   (433,959)   (468,818)
Retained earnings   2,336,614    2,418,444 
Accumulated other comprehensive income   9,732    56,428 
Total stockholders' equity   3,758,881    3,852,419 
Total liabilities and stockholders' equity  $4,988,720   $4,948,289 

 

See accompanying notes.

 

 3 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

   13-Weeks Ended   26-Weeks Ended 
   June 30,   July 1,   June 30,   July 1, 
   2018   2017   2018   2017 
Net sales  $894,452   $831,486   $1,605,325   $1,472,996 
                     
Cost of goods sold   371,182    347,356    655,520    616,060 
                     
Gross profit   523,270    484,130    949,805    856,936 
                     
Advertising expense   43,549    42,009    68,861    73,533 
Selling, general and administrative expense   120,500    105,251    237,564    207,303 
Research and development expense   141,713    127,248    283,670    249,450 
Total operating expense   305,762    274,508    590,095    530,286 
                     
Operating income   217,508    209,622    359,710    326,650 
                     
Other income (expense):                    
Interest income   10,995    9,281    21,222    17,724 
Foreign currency gains (losses)   2,647    15,110    3,463    (22,387)
Other income   4,918    314    5,653    715 
Total other income (expense)   18,560    24,705    30,338    (3,948)
                     
Income before income taxes   236,068    234,327    390,048    322,702 
                     
Income tax provision (benefit)   45,726    57,348    70,333    (92,680)
                     
Net income  $190,342   $176,979   $319,715   $415,382 
                     
Net income per share:                    
Basic  $1.01   $0.94   $1.70   $2.21 
Diluted  $1.00   $0.94   $1.69   $2.20 
                     
Weighted average common shares outstanding:                    
Basic   188,542    187,757    188,432    187,974 
Diluted   189,461    188,492    189,377    188,691 

 

See accompanying notes.

 

 4 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

   13-Weeks Ended   26-Weeks Ended 
   June 30,   July 1,   June 30,   July 1, 
   2018   2017   2018   2017 
Net income  $190,342   $176,979   $319,715   $415,382 
Foreign currency translation adjustment   (49,868)   3,289    (26,368)   65,903 
Change in fair value of available-for-sale marketable securities, net of deferred taxes   (4,842)   4,501    (19,876)   11,402 
Comprehensive income  $135,632   $184,769   $273,471   $492,687 

 

See accompanying notes.

 

 5 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   26-Weeks Ended 
   June 30,   July 1, 
   2018   2017 
Operating activities:          
Net income  $319,715   $415,382 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   31,800    29,558 
Amortization   16,420    13,273 
Gain on sale or disposal of property and equipment   (1,042)   (56)
Provision for doubtful accounts   616    351 
Provision for obsolete and slow moving inventories   11,725    11,072 
Unrealized foreign currency loss   2,401    26,325 
Deferred income taxes   11,000    (159,384)
Stock compensation expense   27,747    20,385 
Realized losses on marketable securities   231    584 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   48,099    23,785 
Inventories   (4,666)   (34,621)
Other current and non-current assets   (4,841)   (6,328)
Accounts payable   1,618    (20,942)
Other current and non-current liabilities   (49,237)   (48,162)
Deferred revenue   (7,483)   (15,637)
Deferred costs   962    2,890 
Income taxes payable   32,998    5,352 
Net cash provided by operating activities   438,063    263,827 
           
Investing activities:          
Purchases of property and equipment   (93,072)   (39,812)
Proceeds from sale of property and equipment   1,282    121 
Purchase of intangible assets   (2,452)   (6,336)
Purchase of marketable securities   (209,387)   (243,880)
Redemption of marketable securities   127,152    278,719 
Acquisitions, net of cash acquired   (9,417)   (7,500)
Net cash used in investing activities   (185,894)   (18,688)
           
Financing activities:          
Dividends   (196,086)   (191,691)
Proceeds from issuance of treasury stock related to equity awards   14,142    10,316 
Purchase of treasury stock related to equity awards   (6,900)   (3,582)
Purchase of treasury stock under share repurchase plan   -    (63,957)
Net cash used in financing activities   (188,844)   (248,914)
           
Effect of exchange rate changes on cash, cash equivalents, and restricted cash   (8,217)   16,456 
           
Net increase in cash, cash equivalents, and restricted cash   55,108    12,681 
Cash, cash equivalents, and restricted cash at beginning of period   891,759    846,996 
Cash, cash equivalents, and restricted cash at end of period  $946,867   $859,677 

 

See accompanying notes.

 

 6 

 

 

Garmin Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

June 30, 2018

(In thousands, except per share information)

 

1.Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week and 26-week periods ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 29, 2018.

 

The condensed consolidated balance sheet at December 30, 2017 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.

 

The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended June 30, 2018 and July 1, 2017 both contain operating results for 13 weeks.

 

As previously announced and discussed below within the “Recently Adopted Accounting Standards” section of this footnote, effective 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-Q 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.

 

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 the new revenue standard relate to our accounting for certain arrangements within the auto segment.

 

A portion of the Company’s auto segment contracts have historically been accounted for under Accounting Standards Codification (ASC) Topic 985-605 Software-Revenue Recognition (Topic 985-605). Under Topic 985-605, the Company deferred revenue and associated costs of all elements of multiple-element software arrangements if vendor-specific objective evidence of fair value (VSOE) could not be established for an undelivered element (e.g. map updates). In applying the new revenue standard to certain contracts that include both software licenses and map updates, we will recognize the portion of revenue and costs related to the software license at the time of delivery rather than ratably over the map update period.

 

 7 

 

 

Additionally, for certain multiple-element arrangements within the Company’s auto segment, the Company’s policy has been to allocate consideration to traffic services and recognize the revenue and associated cost of royalties ratably over the estimated life of the underlying product. Under the new revenue standard, we will recognize revenue and associated costs of royalties related to certain traffic services at the time of hardware and/or software delivery. Specifically, the new revenue standard emphasizes the timing of the Company’s performance, and upon delivery of the navigation device and/or software, the Company has fully performed its obligation with respect to the design and production of the product to receive and interpret the broadcast traffic signal for the benefit of the end user.

 

The changes in accounting policy described above collectively result in reductions to deferred costs (asset) and deferred revenue (liability) balances, and accelerate the recognition of revenues and deferred costs in the auto segment going forward.

 

Summarized financial information depicting the impact of the new revenue standard is presented below. The Company’s historical net cash flows provided by or used in operating, investing, and financing activities are not impacted by adoption of the new revenue standard.

 

   13-Weeks Ended July 1, 2017   26-Weeks Ended July 1, 2017 
                         
   As reported   Restated(1)   Impact   As reported   Restated(1)   Impact 
Net sales  $816,885   $831,486   $14,601   $1,455,431   $1,472,996   $17,565 
Gross profit   477,858    484,130    6,272    849,981    856,936    6,955 
Operating income   203,350    209,622    6,272    319,695    326,650    6,955 
Income tax (benefit)   57,105    57,348    243    (93,015)   (92,680)   335 
Net income  $170,950   $176,979   $6,029   $408,762   $415,382   $6,620 
Diluted net income per share  $0.91   $0.94   $0.03   $2.17   $2.20   $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 our press release attached as Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on February 21, 2018 have been revised in this Note by immaterial amounts in connection with our adoption of ASC Topic 606.

 

   December 30, 2017   December 31, 2016 
                         
   As reported   Restated(2)   Impact   As reported   Restated(2)   Impact 
                         
Current assets:                              
Deferred costs  $48,312   $30,525   $(17,787)  $47,395   $34,665   $(12,730)
Total current assets   2,363,925    2,346,138    (17,787)   2,263,016    2,250,286    (12,730)
Deferred income taxes   199,343    195,981    (3,362)   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)

 

 8 

 

 

   52-Weeks Ended December 30, 2017   53-Weeks Ended December 31, 2016 
                         
   As reported   Restated(2)   Impact   As reported   Restated(2)   Impact 
Net sales  $3,087,004   $3,121,560   $34,556   $3,018,665   $3,045,797   $27,132 
Gross profit   1,783,164    1,797,941    14,777    1,679,570    1,688,525    8,955 
Operating income   668,860    683,637    14,777    623,909    632,864    8,955 
Income tax (benefit) provision   (12,661)   (11,936)   725    118,856    120,901    2,045 
Net income  $694,955   $709,007   $14,052   $510,814   $517,724   $6,910 
Diluted net income per share  $3.68   $3.76   $0.08   $2.70   $2.73   $0.03 

 

(2)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.

 

The total of cash and cash equivalents and restricted cash balances presented on the condensed consolidated balance sheet reconciles to the total cash, cash equivalents, and restricted cash shown in the condensed consolidated statements of cash flows.

 

Income Taxes

 

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company has adopted the new standard effective beginning in the 2018 fiscal year, which resulted in a reclassification of $1,700 of certain prepaid tax balances in a cumulative effect to retained earnings as of the date of adoption.

 

 9 

 

 

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.

 

Significant Accounting Policies

 

For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017. Other than the policies discussed below, there were no material changes to the Company’s significant accounting policies during the 26-week period ended June 30, 2018.

 

Revenue Recognition

 

The Company recognizes revenue upon the transfer of control of promised products or services to the customer in an amount that depicts the consideration the Company expects to be entitled to for the related products or services.   For the large majority of the Company’s sales, transfer of control occurs once product has shipped and title and risk of loss have transferred to the customer. The Company offers certain tangible products with ongoing services promised over a period of time, typically the useful life of the related tangible product. When we have identified such services as both capable of being distinct and separately identifiable from the related tangible product, the associated revenue allocated to such services is recognized over time.  The Company generally does not offer specified or unspecified upgrade rights to its customers in connection with software sales.

 

For products that include tangible hardware that contains software essential to the tangible product’s functionality and ongoing services identified as separately identifiable performance obligations, the Company allocates revenue to all performance obligations based on their relative standalone selling prices (“SSP”), with the amounts allocated to ongoing services deferred and recognized over a period of time. These ongoing services primarily consist of the Company’s contractual promises to provide personal navigation device (PND) users with lifetime map updates (LMU) and server-based traffic services. In addition, we provide map update services (map care) over a contractual period in certain hardware and software contracts with original equipment manufacturers (OEMs). The Company has determined that directly observable prices do not exist for LMU, map care, or server-based traffic, as stand-alone and unbundled unit sales do not occur on more than a limited basis. Therefore, the Company uses the expected cost plus a margin as the primary indicator to calculate relative SSP of the LMU, map care, and traffic performance obligations. The revenue and associated costs allocated to the LMU, map care, and/or the server-based traffic service are deferred and recognized ratably over the estimated life of the products of approximately 3 years for PNDs, or the contractual map care period in OEM contracts of 3-10 years as we believe our efforts as it relates to providing these services are spread evenly throughout the performance period. In addition to the products listed above, the Company has offered certain other products with ongoing performance obligations including mobile applications, incremental navigation and/or communication service subscriptions, aviation database subscriptions, and extended warranties that are individually immaterial.

 

The Company records revenue net of sales tax and variable consideration such as trade discounts and customer returns.  Payment is due typically within 90 days or less of shipment of product, or upon the grant of a given software license (as applicable). The Company records estimated reductions to revenue in the form of variable consideration for customer sales programs, returns and incentive offerings including rebates, price protection (product discounts offered to retailers to assist in clearing older products from their inventories in advance of new product releases), promotions and other volume-based incentives.  The reductions to revenue are based on estimates and judgments using historical experience and expectation of future conditions.  Changes in these estimates could negatively affect the Company’s operating results.  These incentives are reviewed periodically and, with the exceptions of price protection and certain other promotions, typically accrued for on a percentage of sales basis.

 

 10 

 

 

Deferred Revenues and Costs

 

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 condensed consolidated financial statements.

 

2.Inventories

 

The components of inventories consist of the following:

 

   June 30,   December 30, 
   2018   2017 
         
Raw materials  $190,524   $179,659 
Work-in-process   85,811    75,754 
Finished goods   225,155    262,231 
Inventories  $501,490   $517,644 

 

 11 

 

 

3.Earnings Per Share

 

The following table sets forth the computation of basic and diluted net income per share:

 

   13-Weeks Ended 
   June 30,   July 1, 
   2018   2017 
Numerator:          
Numerator for basic and diluted net income per share - net income  $190,342   $176,979 
           
Denominator:          
Denominator for basic net income per share – weighted-average common shares   188,542    187,757 
           
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units   919    735 
           
Denominator for diluted net income per share – adjusted weighted-average common shares   189,461    188,492 
           
Basic net income per share  $1.01   $0.94 
           
Diluted net income per share  $1.00   $0.94 

 

   26-Weeks Ended 
   June 30,   July 1, 
   2018   2017 
Numerator:          
Numerator for basic and diluted net income per share - net income  $319,715   $415,382 
           
Denominator:          
Denominator for basic net income per share – weighted-average common shares   188,432    187,974 
           
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units   945    717 
           
Denominator for diluted net income per share – adjusted weighted-average common shares   189,377    188,691 
           
Basic net income per share  $1.70   $2.21 
           
Diluted net income per share  $1.69   $2.20 

 

There were no anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week period ended June 30, 2018 and 1,057 anti-dilutive equity awards outstanding during the 13-week period ended July 1, 2017.

 

There were no anti-dilutive equity awards outstanding during the 26-week period ended June 30, 2018 and 1,825 anti-dilutive equity awards outstanding during the 26-week period ended July 1, 2017.

 

 12 

 

 

There were 46 and 9 net shares issued as a result of exercises and releases of equity awards for the 13-week periods ended June 30, 2018 and July 1, 2017, respectively.

 

There were 378 and 159 net shares issued as a result of exercises and releases of equity awards for the 26-week periods ended June 30, 2018 and July 1, 2017, respectively.

 

There were 230 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 13-week and 26-week periods ended June 30, 2018.

 

There were 248 ESPP shares issued from outstanding Treasury stock during the 13-week and 26-week periods ended July 1, 2017.

 

4.Segment Information

 

The Company has identified five reportable segments – auto, aviation, marine, outdoor and fitness. Net sales (“revenue”), gross profit, and operating income for each of the Company’s reportable segments are presented below.

 

   Reportable Segments 
                         
   Outdoor   Fitness   Marine   Auto   Aviation   Total 
                         
13-Weeks Ended June 30, 2018                              
                               
Net sales  $201,640   $225,095   $134,583   $180,128   $153,006   $894,452 
Gross profit   128,872    126,431    78,785    75,452    113,730    523,270 
Operating income   71,916    52,548    27,768    12,612    52,664    217,508 
                               
13-Weeks Ended July 1, 2017                              
                               
Net sales  $194,776   $181,022   $108,545   $223,083   $124,060   $831,486 
Gross profit   127,813    102,139    62,368    99,309    92,501    484,130 
Operating income   74,284    37,487    24,295    34,198    39,358    209,622 
                               
26-Weeks Ended June 30, 2018                              
                               
Net sales  $345,899   $391,130   $248,138   $321,439   $298,719   $1,605,325 
Gross profit   222,158    223,032    145,468    136,463    222,684    949,805 
Operating income   115,739    85,922    40,899    16,079    101,071    359,710 
                               
26-Weeks Ended July 1, 2017                              
                               
Net sales  $310,652   $318,852   $212,990   $383,571   $246,931   $1,472,996 
Gross profit   201,282    179,879    122,116    169,925    183,734    856,936 
Operating income   108,735    55,959    42,440    41,550    77,966    326,650 

 

Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.

 

 13 

 

 

Net sales to external customers by geographic region were as follows for the 13-week and 26-week periods ended June 30, 2018 and July 1, 2017. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:

 

   13-Weeks Ended   26-Weeks Ended 
   June 30,   July 1,   June 30,   July 1, 
   2018   2017   2018   2017 
Americas  $437,116   $401,409   $783,091   $726,038 
EMEA   309,116    314,649    555,029    539,984 
APAC   148,220    115,428    267,205    206,974 
Net sales to external customers  $894,452   $831,486   $1,605,325   $1,472,996 

 

Net property and equipment by geographic region as of June 30, 2018 and July 1, 2017 are presented below.

 

   Americas   APAC   EMEA   Total 
June 30, 2018                    
Property and equipment, net  $395,638   $202,455   $39,152   $637,245 
                     
July 1, 2017                    
Property and equipment, net  $326,125   $153,277   $37,888   $517,290 

 

5.Warranty Reserves

 

The Company’s products sold are generally covered by a standard warranty for periods ranging from one to three years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectation of future conditions and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.

 

   13-Weeks Ended 
   June 30,   July 1, 
   2018   2017 
         
Balance - beginning of period  $35,422   $34,427 
Accrual for products sold during the period   17,113    15,747 
Expenditures   (14,106)   (13,162)
Balance - end of period  $38,429   $37,012 

 

   26-Weeks Ended 
   June 30,   July 1, 
   2018   2017 
         
Balance - beginning of period  $36,827   $37,233 
Accrual for products sold during the period   27,125    23,947 
Expenditures   (25,523)   (24,168)
Balance - end of period  $38,429   $37,012 

 

6.Commitments and Contingencies

 

Commitments

 

The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of June 30, 2018 was approximately $343,000. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

 

 14 

 

 

Contingencies

 

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly and annual basis, developments in legal proceedings, investigations, claims, and other loss contingencies that could affect any required accrual or disclosure or estimate of reasonably possible loss or range of loss. An estimated loss from a loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, the Company accrues the minimum amount in the range.

 

If an outcome unfavorable to the Company is determined to be probable, but the amount of loss cannot be reasonably estimated or is determined to be reasonably possible, but not probable, we disclose the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company’s aggregate range of reasonably possible losses includes (1) matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability, and (2) matters where a loss is believed to be reasonably possible, but not probable, and a liability therefore has not been accrued. This aggregate range only represents the Company’s estimate of reasonably possible losses and does not represent the Company’s maximum loss exposure. The assessment regarding whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. In assessing the probability of an outcome in a lawsuit, claim or assessment that could be unfavorable to the Company, we consider the following factors, among others: a) the nature of the litigation, claim, or assessment; b) the progress of the case; c) the opinions or views of legal counsel and other advisers; d) our experience in similar cases; e) the experience of other entities in similar cases; and f) how we intend to respond to the lawsuit, claim, or assessment. Costs incurred in defending lawsuits, claims or assessments are expensed as incurred.

 

Management of the Company currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal quarter ended June 30, 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.

 

7.Income Taxes

 

The Company recorded income tax expense of $45,726 in the 13-week period ended June 30, 2018, compared to income tax expense of $57,348 in the 13-week period ended July 1, 2017, which included tax expense of $7,275 associated with the expiration of share-based awards. The effective tax rate was 19.4% in the second quarter of 2018, compared to 24.5% in the second quarter of 2017. Excluding the effect of the $7,275 tax expense associated with the expiration of share-based awards in second quarter of 2017, the second quarter of 2018 effective tax rate decreased 200 basis points compared to the effective tax rate in the prior year quarter primarily due to the reduction of the U.S. corporate tax rate.

 

The Company recorded income tax expense of $70,333 in the first half of 2018, compared to an income tax benefit of $92,680 in the first half of 2017, which included tax expense of $7,275 associated with the expiration of share-based awards and an income tax benefit of $168,755 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 effective tax rate was 18.0% in the first half of 2018, compared to (28.7%) in the first half of 2017. Excluding the income tax benefit of $168,755 primarily related to the revaluation of Switzerland deferred tax assets, and the $7,275 tax expense due to the expiration of share-based awards, the effective tax rate for the first half of 2018 decreased 330 basis points compared to the effective tax rate in the first half of 2017 primarily due to the reduction of the U.S. corporate tax rate.

 

 15 

 

 

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 legislations, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows for the recognition of provisional amounts during a measurement period. The Company recorded a provisional re-measurement of its deferred tax assets and liabilities in the fourth quarter of 2017. Income tax expense recorded in the second quarter of 2018 includes the impact of the new tax legislation as currently interpreted by the Company. The Company will continue to assess the impact of the new tax legislation, as well as any related future regulations and rules, and will record any additional impacts as identified during the measurement period, if necessary. The Company does not expect such potential adjustments in future periods will materially impact the Company’s financial condition or result of operations.

 

8.Marketable Securities

 

The Financial Accounting Standards Board ("FASB") ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:

 

Level 1 Unadjusted quoted prices in active markets for the identical asset or liability
   
Level 2 Observable inputs for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability  
   
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.

 

 16 

 

 

Available-for-sale securities measured at fair value on a recurring basis are summarized below:

 

   Fair Value Measurements as
of June 30, 2018
 
   Total   Level 1   Level 2   Level 3 
U.S. Treasury securities  $26,521   $-   $26,521   $- 
Agency securities   41,194    -    41,194    - 
Mortgage-backed securities   149,401    -    149,401    - 
Corporate securities   915,688    -    915,688    - 
Municipal securities   187,932    -    187,932    - 
Other   155,029    -    155,029    - 
Total  $1,475,765   $-   $1,475,765   $- 

 

   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 June 30, 2018
 
     
   Amortized Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
U.S. Treasury securities  $26,944   $-   $(423)  $26,521 
Agency securities   42,400    -    (1,206)   41,194 
Mortgage-backed securities   157,421    3    (8,023)   149,401 
Corporate securities   947,474    55    (31,841)   915,688 
Municipal securities   190,976    20    (3,064)   187,932 
Other   158,041    -    (3,012)   155,029 
Total  $1,523,256   $78   $(47,569)  $1,475,765 

 

   Available-For-Sale Securities as
of December 30, 2017
 
     
   Amortized Cost   Gross Unrealized
Gains
   Gross Unrealized
Losses
   Fair Value 
U.S. Treasury securities  $19,591   $-   $(254)  $19,337 
Agency securities   44,191    1    (831)   43,361 
Mortgage-backed securities   180,470    13    (5,868)   174,615 
Corporate securities   830,447    136    (13,790)   816,793 
Municipal securities   187,999    110    (2,004)   186,105 
Other   183,730    2    (2,223)   181,509 
Total  $1,446,428   $262   $(24,970)  $1,421,720 

 

The Company’s investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities that have an unrealized loss shown in the table above, and it is not more likely than not that the Company will be required to sell a security before recovery of its amortized costs basis, which may be maturity.

 

 17 

 

 

The Company recognizes the credit component of other-than-temporary impairments of debt securities in "Other Income" and the noncredit component in "Other comprehensive income (loss)" for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During fiscal 2017 and the 26-week period ended June 30, 2018, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and fair value of the securities at an unrealized loss position as of June 30, 2018 were $1,470,296 and $1,422,727, respectively. Approximately 83% of securities in our portfolio were at an unrealized loss position as of June 30, 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 condensed consolidated statement of income.

 

The cost of securities sold is based on the specific identification method.

 

The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of June 30, 2018 and December 30, 2017.

 

   As of June 30, 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  $(242)  $17,223   $(181)  $6,301 
Agency securities   (265)   15,500    (941)   25,695 
Mortgage-backed securities   (414)   10,473    (7,609)   138,374 
Corporate securities   (13,208)   555,067    (18,633)   343,384 
Municipal securities   (1,774)   140,340    (1,290)   40,516 
Other   (2,679)   110,889    (333)   18,965 
Total  $(18,582)  $849,492   $(28,987)  $573,235 

 

   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 June 30, 2018, by maturity, are shown below.

 

   Amortized Cost   Fair Value 
         
Due in one year or less  $174,038   $173,318 
Due after one year through five years   1,218,992    1,181,277 
Due after five years through ten years   130,226    121,170 
   $1,523,256   $1,475,765 

 

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9.Accumulated Other Comprehensive Income

 

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week and 26-week periods ended June 30, 2018:

 

   13-Weeks Ended June 30, 2018 
   Foreign Currency
Translation Adjustment
   Net unrealized gains
(losses) on available-for-
sale securities
   Total 
Beginning Balance  $102,792   $(38,350)  $64,442 
Other comprehensive income before reclassification, net of income tax benefit of $492   (49,868)   (4,874)   (54,742)
Amounts reclassified from accumulated other comprehensive income   -    32    32 
Net current-period other comprehensive income   (49,868)   (4,842)   (54,710)
Reclassification of tax effects due to adoption of ASU 2018-02   -    -    - 
Ending Balance  $52,924   $(43,192)  $9,732 

 

   26-Weeks Ended June 30, 2018 
   Foreign Currency
Translation Adjustment
   Net unrealized gains
(losses) on available-for-
sale securities
   Total 
Beginning Balance  $79,292   $(22,864)  $56,428 
Other comprehensive income before reclassification, net of income tax benefit of $2,907   (26,368)   (20,137)   (46,505)
Amounts reclassified from accumulated other comprehensive income   -    261    261 
Net current-period other comprehensive income   (26,368)   (19,876)   (46,244)
Reclassification of tax effects due to adoption of ASU 2018-02   -    (452)   (452)
Ending Balance  $52,924   $(43,192)  $9,732 

 

 19 

 

 

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 26-week periods ended June 30, 2018:

 

13-Weeks Ended June 30, 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  $(37)  Other income (expense)
    5   Income tax benefit (provision)
   $(32)  Net of tax

 

26-Weeks Ended June 30, 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  $(231)  Other income (expense)
    (30)  Income tax benefit (provision)
   $(261)  Net of tax

 

10.Revenue

 

In order to further depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors, we disaggregate revenue (or “net sales”) by major product category, geographic region, and pattern of recognition.

 

The Company has identified six major product categories – aviation, marine, outdoor, fitness, auto PND, and auto OEM. Note 4 – Segment Information contains disaggregated revenue information of the aviation, marine, outdoor and fitness major product categories. The auto OEM and auto PND major product categories comprised 30% and 70%, respectively, of the auto segment revenue presented in Note 4 for the 13-weeks ended June 30, 2018 and July 1, 2017. Auto OEM comprised 33% and 31% of auto segment revenue for the 26-weeks ended June 30, 2018 and July 1, 2017, respectively, while auto PND comprised 67% and 69% of auto segment revenue during the same respective periods. Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is also presented in Note 4.

 

A large majority of the Company’s sales are recognized on a point in time basis, usually once the product is shipped and title and risk of loss have transferred to the customer. Sales recognized over a period of time are primarily within the auto segment and relate to performance obligations that are satisfied over the life of the product or contractual service period. Revenue disaggregated by the timing of transfer of the goods or services is presented in the table below:

 

   13-Weeks Ended   26-Weeks Ended 
   June 30,   July 1,   June 30,   July 1, 
   2018   2017   2018   2017 
Point in time  $854,260   $789,867   $1,525,524   $1,389,612 
Over time   40,192    41,619    79,801    83,384 
Net sales  $894,452   $831,486   $1,605,325   $1,472,996 

 

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Transaction price and costs associated with the Company’s unsatisfied performance obligations are reflected as deferred revenue and deferred costs, respectively, on the Company’s Condensed Consolidated Balance Sheets. Such amounts are recognized ratably over the applicable service period or estimated useful life. Changes in deferred revenue and costs during the 26-weeks ended June 30, 2018 are presented below:

 

   26-Weeks Ended 
   June 30, 
   2018 
   Deferred Revenue(1)   Deferred Costs(2) 
         
Balance, beginning of period  $190,200   $63,554 
Deferrals in period   72,283    18,170 
Recognition of deferrals in period   (79,801)   (19,137)
Balance, end of period  $182,682   $62,587 
           
(1) Deferred revenue is comprised of both Deferred revenue and Noncurrent deferred revenue per the Condensed Consolidated Balance Sheets
           
(2) Deferred costs are comprised of both Deferred costs and Noncurrent deferred costs per the Condensed Consolidated Balance Sheets

 

Of the $79,801 of deferred revenue recognized in the 26-weeks ended June 30, 2018, $59,759 was deferred as of the beginning of the period.

 

Approximately two-thirds of the $182,682 of deferred revenue at the end of the period, June 30, 2018, is recognized ratably over a period of three years or less.

 

11.Recently Issued Accounting Pronouncements Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB subsequently issued Accounting Standards Update No. 2018-10, which includes clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). 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. Early adoption is permitted.

 

The Company plans to adopt Topic 842 effective at the beginning of the 2019 fiscal year using the modified retrospective approach. The Company plans on electing the package of transitional practical expedients upon adoption which, among other provisions, allows the Company to carry forward historical lease classification. The Company is also in the process of implementing changes to accounting policies, processes, systems, and internal controls. The new standard will result in increases to the assets and liabilities on the Company’s consolidated balance sheets. The Company is currently evaluating the full impact of adopting the new standard.

 

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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.

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company’s assumptions prove incorrect or should unanticipated circumstances arise, actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's website at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.

 

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 30, 2017.

 

The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five reportable segments, the outdoor, fitness, marine, auto and aviation markets. The Company’s segments offer products through its network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.

 

The Company adopted the new accounting standard for revenue recognition, as discussed in Note 1 – Accounting Policies of the Notes to Condensed Consolidated Financial Statements, effective beginning with the Company’s first quarter of 2018. Adoption of the new revenue recognition standard was applied using the full retrospective method, and information for prior periods within Results of Operations have been restated accordingly.

 

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Results of Operations

 

The following table sets forth the Company’s results of operations as a percent of net sales during the periods shown (the table may not foot due to rounding):

 

   13-Weeks Ended 
   June 30, 2018   July 1, 2017 
         
Net sales   100%   100%
Cost of goods sold   41%   42%
Gross profit   59%   58%
Advertising expense   5%   5%
Selling, general and administrative expense   13%   13%
Research and development expense   16%   15%
Total operating expense   34%   33%
Operating income   24%   25%
Other income (expense)   2%   3%
Income before income taxes   26%   28%
Income tax provision (benefit)   5%   7%
Net income   21%   21%

 

   26-Weeks Ended 
   June 30, 2018   July 1, 2017 
         
Net sales   100%   100%
Cost of goods sold   41%   42%
Gross profit   59%   58%
Advertising expense   4%   5%
Selling, general and administrative expense   15%   14%
Research and development expense   18%   17%
Total operating expense   37%   36%
Operating income   22%   22%
Other income (expense)   2%   (0)%
Income before income taxes   24%   22%
Income tax provision (benefit)   4%   (6)%
Net income   20%   28%

 

Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The segment table located in Note 4 to the Condensed Consolidated Financial Statements sets forth the Company’s results of operations (in thousands) including net sales, gross profit, and operating income for each of the Company’s five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, auto, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.

 

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Comparison of 13-weeks ended June 30, 2018 and July 1, 2017

(Amounts included in the following discussion are stated in thousands unless otherwise indicated)

 

Net Sales

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017   Year over Year 
   Net Sales   % of Revenues   Net Sales   % of Revenues   $ Change   % Change 
Outdoor  $201,640    23%  $194,776    23%  $6,864    4%
Fitness   225,095    25%   181,022    22%   44,073    24%
Marine   134,583    15%   108,545    13%   26,038    24%
Auto   180,128    20%   223,083    27%   (42,955)   -19%
Aviation   153,006    17%   124,060    15%   28,946    23%
Total  $894,452    100%  $831,486    100%  $62,966    8%

 

Net sales increased 8% for the 13-week period ended June 30, 2018 when compared to the year-ago quarter. The outdoor, aviation, marine, and fitness segments collectively increased by 17%, contributing 80% of total revenue. Fitness was the largest portion of our revenue mix at 25% in the second quarter of 2018 compared to 22% in the second quarter of 2017. Auto revenue represented the largest portion of our revenue mix in the second quarter of 2017 at 27% and declined to 20% in the second quarter of 2018.

 

Total unit sales in the second quarter of 2018 decreased to 3,783 when compared to total unit sales of 3,904 in the second quarter of 2017.

 

Auto segment revenue decreased 19% from the year-ago quarter, primarily due to the ongoing PND market contraction. Outdoor, fitness, marine, and aviation segment revenues increased 4%, 24%, 24%, and 23%, respectively, when compared to the year-ago quarter. The current quarter marine segment increase was primarily driven by sales of the newly acquired Navionics business, in addition to sales growth across most product lines. The fitness segment revenues increase was primarily driven by strong sales in advanced wearables and cycling products. Outdoor and aviation segment revenue increases were driven by increased sales across most product lines within each segment.

 

Cost of Goods Sold

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017   Year over Year 
   Cost of Goods   % of Revenues   Cost of Goods   % of Revenues   $ Change   % Change 
Outdoor  $72,768    36%  $66,963    34%  $5,805    9%
Fitness   98,664    44%   78,883    44%   19,781    25%
Marine   55,798    41%   46,177    43%   9,621    21%
Auto   104,676    58%   123,774    55%   (19,098)   -15%
Aviation   39,276    26%   31,559    25%   7,717    24%
Total  $371,182    41%  $347,356    42%  $23,826    7%

 

Cost of goods sold increased 7% in absolute dollars compared to the prior year quarter. The increase in revenues outpaced the increase in cost of goods sold, which resulted in a 30 basis point decrease in cost of goods sold as a percent of revenues compared to the year-ago quarter.

 

In the auto segment, cost of goods sold continued to decline with revenue declines and the slight increase of cost of goods sold as a percent of revenue was primarily due to the write-down of certain product inventories in the second quarter of 2018. In the marine segment, the decrease in cost of goods sold as a percent of revenue primarily resulted from the favorable impact of higher margin Navionics sales on product mix. The outdoor segment increase in cost of goods sold as a percent of revenue primarily resulted from increased promotional activity during the second quarter of 2018.  The fitness and aviation segments increase in cost of goods was largely consistent with the increase in sales.

 

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Gross Profit

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017   Year over Year 
   Gross Profit   % of Revenues   Gross Profit   % of Revenues   $ Change   % Change 
Outdoor  $128,872    64%  $127,813    66%  $1,059    1%
Fitness   126,431    56%   102,139    56%   24,292    24%
Marine   78,785    59%   62,368    57%   16,417    26%
Auto   75,452    42%   99,309    45%   (23,857)   -24%
Aviation   113,730    74%   92,501    75%   21,229    23%
Total  $523,270    59%  $484,130    58%  $39,140    8%

 

Gross profit dollars in the second quarter of 2018 increased 8% while gross margin increased 30 basis points compared to the year-ago quarter. Gross margin in the outdoor and auto segments decreased compared to the year-ago quarter, as discussed above. Gross margin in the marine segment increased compared to the year-ago quarter, as discussed above. Gross margin remained relatively flat across the aviation and fitness segments.

 

Advertising Expense

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017     
   Advertising       Advertising       Year over Year 
   Expense   % of Revenues   Expense   % of Revenues   $ Change   % Change 
Outdoor  $10,700    5%  $13,577    7%  $(2,877)   -21%
Fitness   18,534    8%   17,220    10%   1,314    8%
Marine   5,142    4%   4,380    4%   762    17%
Auto   6,691    4%   5,418    2%   1,273    23%
Aviation   2,482    2%   1,414    1%   1,068    76%
Total  $43,549    5%  $42,009    5%  $1,540    4%

 

Advertising expense increased 4% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The total absolute dollar increase was driven primarily by increased cooperative advertising associated with higher sales. Auto advertising expense, in absolute dollars and as a percent of revenue, increased compared to the year-ago quarter primarily due to a refresh of point-of-sale displays. Outdoor advertising expense decreased in absolute dollars and as a percent of revenues due to reduced media advertising spend. Advertising expense, as a percent of revenues, decreased in the fitness segment due to greater leverage on fitness advertising spend.

 

Selling, General and Administrative Expense

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017     
   Selling, General &       Selling, General &       Year over Year 
   Admin. Expenses   % of Revenues   Admin. Expenses   % of Revenues   $ Change   % Change 
Outdoor  $28,591    14%  $25,938    13%  $2,653    10%
Fitness   32,797    15%   27,132    15%   5,665    21%
Marine   25,683    19%   18,579    17%   7,104    38%
Auto   24,987    14%   26,785    12%   (1,798)   -7%
Aviation   8,442    6%   6,817    5%   1,625    24%
Total  $120,500    13%  $105,251    13%  $15,249    14%

 

Selling, general and administrative expense increased 14% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The absolute dollar increase in the second quarter of 2018 was primarily attributable to personnel costs and expenses from recent acquisitions. The auto segment increase as a percent of revenues in the second quarter of 2018 was primarily attributable to accelerated amortization of an intangible asset related to a previous acquisition. The increase in absolute dollars and as a percent of revenues in the marine segment was primarily attributable to expenses associated with recent acquisitions.

 

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Research and Development Expense

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017     
   Research &       Research &       Year over Year 
   Development   % of Revenues   Development   % of Revenues   $ Change   % Change 
Outdoor  $17,665    9%  $14,014    7%  $3,651    26%
Fitness   22,552    10%   20,300    11%   2,252    11%
Marine   20,192    15%   15,114    14%   5,078    34%
Auto   31,162    17%   32,908    15%   (1,746)   -5%
Aviation   50,142    33%   44,912    36%   5,230    12%
Total  $141,713    16%  $127,248    15%  $14,465    11%

 

Research and development expense increased $14.5 million in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. This increase was primarily due to engineering personnel costs related to wearable and aviation product offerings and expenses resulting from recent acquisitions within the marine segment. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

Operating Income

 

   13-Weeks ended June 30, 2018   13-Weeks ended July 1, 2017   Year over Year 
   Operating Income   % of Revenues   Operating Income   % of Revenues   $ Change   % Change 
Outdoor  $71,916    36%  $74,284    38%  $(2,368)   -3%
Fitness   52,548    23%   37,487    21%   15,061    40%
Marine   27,768    21%   24,295    22%   3,473    14%
Auto   12,612    7%   34,198    15%   (21,586)   -63%
Aviation   52,664    34%   39,358    32%   13,306    34%
Total  $217,508    24%  $209,622    25%  $7,886    4%

 

Operating income increased 4% in absolute dollars and decreased 90 basis points as a percent of revenue when compared to the year-ago quarter. The growth in operating income in absolute dollars is primarily attributable to revenue growth while the slight decrease in operating income as a percent of revenues is primarily attributable to the increased operating expenses, as discussed above.

 

Other Income (Expense)

 

   13-Weeks ended   13-Weeks ended 
   June 30, 2018   July 1, 2017 
Interest income  $10,995   $9,281 
Foreign currency gains   2,647    15,110 
Other   4,918    314 
Total  $18,560   $24,705 

 

The average return on cash and investments, including interest and capital gains/losses, during the second quarter of 2018 was 1.9% compared to 1.6% during the same quarter of 2017.  Interest income increased primarily due to slightly higher yields on fixed-income securities.

 

Foreign currency gains and losses for the Company are typically driven by movements in the Taiwan Dollar, Euro, and British Pound Sterling in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation, the U.S. Dollar is the functional currency of Garmin (Europe) Ltd., and the Euro is the functional currency of most of our other European subsidiaries, although some transactions and balances are denominated in British Pounds. The majority of the Company’s consolidated foreign currency gain or loss is typically driven by the significant cash and marketable securities, receivables and payables held in a currency other than the functional currency at a given legal entity. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, Euro, and British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

 

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The $2.6 million currency gain recognized in the second quarter of 2018 was primarily due to the strengthening of the U.S. Dollar against the Taiwan Dollar, partially offset by the U.S. Dollar strengthening against the Euro and British Pound Sterling within the 13-weeks ended June 30, 2018. During this period, the U.S. Dollar strengthened 4.7% against the Taiwan Dollar, resulting in a gain of $26.7 million, while the U.S. Dollar strengthened 5.2% against the Euro and 5.8% against the British Pound Sterling, resulting in losses of $14.0 million and $1.9 million, respectively. The remaining net currency loss of $8.2 million was related to other currencies and timing of transactions.

 

The $15.1 million currency gain recognized in the second quarter of 2017 was primarily due to the weakening of the U.S. Dollar against the Euro and the British Pound Sterling and slight strengthening against the Taiwan Dollar within the 13-weeks ended July 1, 2017. During this period, the U.S. Dollar weakened 7.3% against the Euro and 3.8% against the British Pound Sterling, resulting in gains of $11.5 million and $2.7 million, respectively, while the U.S. Dollar strengthened 0.3% against the Taiwan Dollar, resulting in a gain of $1.3 million. The remaining net currency loss of $0.4 million was related to other currencies and timing of transactions.

 

Income Tax Provision

 

The Company recorded income tax expense of $45.7 million in the 13-week period ended June 30, 2018, compared to income tax expense of $57.3 million in the 13-week period ended July 1, 2017, which included tax expense of $7.3 million associated with the expiration of share-based awards. The effective tax rate was 19.4% in the second quarter of 2018, compared to 24.5% in the second quarter of 2017. Excluding the effect of the $7.3 million tax expense associated with the expiration of share-based awards in second quarter of 2017, the second quarter of 2018 effective tax rate decreased 200 basis points compared to the effective tax rate in the prior year quarter primarily due to the reduction of the U.S. corporate tax rate.

 

Net Income

 

As a result of the above, net income for the 13-weeks ended June 30, 2018 was $190.3 million compared to $177.0 million for the 13-week period ended July 1, 2017, an increase of $13.3 million.

 

Comparison of 26-Weeks Ended June 30, 2018 and 26-Weeks Ended July 1, 2017

 

Net Sales

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017   Year over Year 
   Net Sales   % of Revenues   Net Sales   % of Revenues   $ Change   % Change 
Outdoor  $345,899    22%  $310,652    21%  $35,247    11%
Fitness   391,130    24%   318,852    22%   72,278    23%
Marine   248,138    15%   212,990    14%   35,148    17%
Auto   321,439    20%   383,571    26%   (62,132)   -16%
Aviation   298,719    19%   246,931    17%   51,788    21%
Total  $1,605,325    100%  $1,472,996    100%  $132,329    9%

 

Net sales increased 9% for the 26-week period ended June 30, 2018 when compared to the year-ago period. The outdoor, aviation, marine, and fitness segments collectively increased by 18%, contributing 80% of total revenue. Fitness was the largest portion of our revenue mix at 24% in the first half of 2018 compared to 22% in the first half of 2017. Auto revenue represented the largest portion of our revenue mix in the first half of 2017 at 26% and declined to 20% in the first half of 2018.

 

Total unit sales in the first half of 2018 decreased to 6,739 when compared to the total unit sales of 7,003 in the first half of 2017.

 

Auto segment revenue decreased 16% from the year-ago period, primarily due to the ongoing PND market contraction. Outdoor, fitness, marine, and aviation segment revenues increased 11%, 23%, 17%, and 21%, respectively, from the year-ago period. Marine segment revenue increases were primarily driven by sales from recent acquisitions. Fitness segment revenue increases were primarily driven by strong growth in advanced wearables and newly introduced products. Outdoor segment revenue increases were primarily driven by significant growth in the wearable category. Aviation revenue increases were driven by strong sales across most product lines.

 

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Cost of Goods Sold

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017   Year over Year 
   Cost of Goods   % of Revenues   Cost of Goods   % of Revenues   $ Change   % Change 
Outdoor  $123,741    36%  $109,370    35%  $14,371    13%
Fitness   168,098    43%   138,973    44%   29,125    21%
Marine   102,670    41%   90,874    43%   11,796    13%
Auto   184,976    58%   213,646    56%   (28,670)   -13%
Aviation   76,035    25%   63,197    26%   12,838    20%
Total  $655,520    41%  $616,060    42%  $39,460    6%

 

Cost of goods sold increased 6% in absolute dollars for the 26-week period ended June 30, 2018 when compared to the year-ago period. The increase in revenues outpaced the increase in cost of goods sold, which resulted in a 100 basis point decrease in cost of goods sold as a percent of revenues compared to the year-ago period.

 

In the auto segment, cost of goods sold continued to decline with revenue declines and the slight increase of cost of goods sold as a percent of revenue was primarily due to the write-down of certain product inventories in the first half of 2018. In the marine segment, the decrease in cost of goods sold as a percent of revenue primarily resulted from the favorable impact of higher margin Navionics sales on product mix. In the fitness segment, the decrease in cost of goods sold as a percent of revenue resulted from a shift in product mix toward higher margin products. In the outdoor and aviation segments, cost of goods sold as a percent of revenue were relatively flat compared to the year-ago period. 

 

Gross Profit

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017   Year over Year 
   Gross Profit   % of Revenues   Gross Profit   % of Revenues   $ Change   % Change 
Outdoor  $222,158    64%  $201,282    65%  $20,876    10%
Fitness   223,032    57%   179,879    56%   43,153    24%
Marine   145,468    59%   122,116    57%   23,352    19%
Auto   136,463    42%   169,925    44%   (33,462)   -20%
Aviation   222,684    75%   183,734    74%   38,950    21%
Total  $949,805    59%  $856,936    58%  $92,869    11%

 

Gross profit dollars in the 26-week period ended June 30, 2018 increased 11% while gross margin increased 100 basis points when compared to the year-ago period. Gross margin declined in the auto segment, as discussed above. Gross margin increased in the fitness and marine segments primarily due to product mix, as discussed above. Gross margin remained relatively flat within the outdoor and aviation segments.

 

Advertising Expense

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017     
   Advertising       Advertising       Year over Year 
   Expense   % of Revenues   Expense   % of Revenues   $ Change   % Change 
Outdoor  $16,500    5%  $18,578    6%  $(2,078)   -11%
Fitness   28,219    7%   31,146    10%   (2,927)   -9%
Marine   10,428    4%   10,002    5%   426    4%
Auto   9,921    3%   10,896    3%   (975)   -9%
Aviation   3,793    1%   2,911    1%   882    30%
Total  $68,861    4%  $73,533    5%  $(4,672)   -6%

 

Advertising expense decreased 6% in absolute dollars when compared to the year-ago period. The overall decrease in absolute dollars was driven primarily by decreased media spend in the outdoor and fitness segments and decreased cooperative advertising expense associated with lower sales in the auto segment.

 

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Selling, General and Administrative Expense

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017     
   Selling, General &       Selling, General &       Year over Year 
   Admin. Expenses   % of Revenues   Admin. Expenses   % of Revenues   $ Change   % Change 
Outdoor  $54,647    16%  $46,608    15%  $8,039    17%
Fitness   64,092    16%   53,680    17%   10,412    19%
Marine   54,136    22%   40,118    19%   14,018    35%
Auto   47,046    15%   53,389    14%   (6,343)   -12%
Aviation   17,643    6%   13,508    5%   4,135    31%
Total  $237,564    15%  $207,303    14%  $30,261    15%

 

Selling, general and administrative expense increased 15% in absolute dollars and increased 70 basis points as a percent of revenues when compared to the year-ago period. The absolute dollar increase was primarily attributable to personnel costs and expenses from recent acquisitions within the marine segment. All segments, except for marine, were relatively flat as a percent of revenues.

 

Research and Development Expense

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017     
   Research &       Research &       Year over Year 
   Development   % of Revenues   Development   % of Revenues   $ Change   % Change 
Outdoor  $35,272    10%  $27,361    9%  $7,911    29%
Fitness   44,799    11%   39,094    12%   5,705    15%
Marine   40,005    16%   29,556    14%   10,449    35%
Auto   63,417    20%   64,090    17%   (673)   -1%
Aviation   100,177    34%   89,349    36%   10,828    12%
Total  $283,670    18%  $249,450    17%  $34,220    14%

 

In absolute dollars, research and development costs increased $34.2 million when compared with the year-ago period and increased 70 basis points as a percent of revenue. The absolute dollar increase in research and development expenses when compared with the year-ago period was primarily due to engineering personnel costs related to our wearable and aviation product offerings and expenses resulting from prior year acquisitions within the marine segment. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

Operating Income

 

   26-Weeks ended June 30, 2018   26-Weeks ended July 1, 2017   Year over Year 
   Operating Income   % of Revenues   Operating Income   % of Revenues   $ Change   % Change 
Outdoor  $115,739    33%  $108,735    35%  $7,004    6%
Fitness   85,922    22%   55,959    18%   29,963    54%
Marine   40,899    16%   42,440    20%   (1,541)   -4%
Auto   16,079    5%   41,550    11%   (25,471)   -61%
Aviation   101,071    34%   77,966    32%   23,105    30%
Total  $359,710    22%  $326,650    22%  $33,060    10%

 

Operating income increased 10% in absolute dollars and was relatively flat as a percent of revenue when compared to the year-ago period. The growth in operating income on an absolute dollar basis was the result of strong revenue growth. Operating income was relatively flat as a percent of revenue primarily due to an increase in gross margin, offset by increased operating expenses as discussed above.

 

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Other Income (Expense)

 

   13-Weeks ended   13-Weeks ended 
   June 30, 2018   July 1, 2017 
Interest income  $21,222   $17,724 
Foreign currency gains (losses)   3,463    (22,387)
Other   5,653    715 
Total  $30,338   $(3,948)

 

The average return on cash and investments, including interest and capital gains/losses, during the 26-week period ended June 30, 2018 was 1.8% compared to 1.5% during the same 26-week period ended July 1, 2017. Interest income increased primarily due to slightly higher yields on fixed-income securities.

 

The $3.5 million currency gain recognized in the first half of 2018 was primarily due to the strengthening of the U.S. Dollar against the Taiwan Dollar, partially offset by the U.S. Dollar strengthening against the Euro and British Pound Sterling within the 26-weeks ended June 30, 2018. During this period, the U.S. Dollar strengthened 2.7% against the Taiwan Dollar, resulting in a gain of $13.9 million, while the U.S. Dollar strengthened 2.6% against the Euro and 2.3% against the British Pound Sterling, resulting in losses of $5.1 million and $0.1 million, respectively. The remaining net currency loss of $5.2 million was related to other currencies and timing of transactions.

 

The $22.4 million currency loss recognized in the first half of 2017 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar within the 26-weeks ended July 1, 2017. During this period, the U.S. Dollar weakened 6.8% against the Taiwan Dollar, resulting in a loss of $41.6 million, while the U.S. Dollar weakened 8.7% against the Euro and 5.6% against the British Pound Sterling, resulting in gains of $14.2 million and $3.5 million, respectively. The remaining net currency gain of $1.5 million was related to other currencies and timing of transactions.

 

Income Tax Provision

 

The Company recorded income tax expense of $70.3 million in the first half of 2018, compared to an income tax benefit of $92.7 million in the first half of 2017, which included tax expense of $7,275 associated with the expiration of share-based awards and an income tax benefit of $168.8 million benefit 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 effective tax rate was 18.0% in the first half of 2018, compared to (28.7%) in the first half of 2017. Excluding the income tax benefit of $168.8 million primarily related to the revaluation of Switzerland deferred tax assets, and the $7.3 million tax expense due to the expiration of share-based awards, the effective tax rate for the first half of 2018 decreased 330 basis points compared to the effective tax rate in the first half of 2017 primarily due to the reduction of the U.S. corporate tax rate.

 

Net Income

 

As a result of the above, net income for the 26-week period ended June 30, 2018 was $319.7 million compared to $415.4 million for the 26-week period ended July 1, 2017, a decrease of $95.7 million.

 

Liquidity and Capital Resources

 

As of June 30, 2018, we had $2,422.4 million of cash and cash equivalents and marketable securities. We primarily use cash flow from operations, and expect that future cash requirements may be used, to fund our capital expenditures, support our working capital requirements, pay dividends, fund strategic acquisitions, and fund share repurchases. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.

 

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It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Board of Directors of each applicable Garmin entity holding the cash. The investment policy’s primary purpose is to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during the first half of 2018 and 2017 were approximately 1.8% and 1.5%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. See Note 8 for additional information regarding marketable securities.

 

Operating Activities

 

   26-Weeks Ended 
   June 30,   July 1, 
(In thousands)  2018   2017 
Net cash provided by operating activities  $438,063   $263,827 

 

The $174.2 million increase in cash provided by operating activities in the first half of 2018 compared to the first half of 2017 was primarily due to the increase in cash provided by working capital of $84.4 million (which included an increase of $24.6 million in net receipts of accounts receivable and a decrease of $30.6 million in cash paid for inventory) and income taxes payable of $27.6 million. Additionally, the year over year decrease in net income of $95.7 million was offset by other non-cash adjustments to net income of $157.9 million, including an income tax benefit of $168.8 million recognized in the first quarter of 2017 related to the revaluation of certain Switzerland deferred tax assets.

 

Investing Activities

 

   26-Weeks Ended 
   June 30,   July 1, 
(In thousands)  2018   2017 
Net cash used in investing activities  $(185,894)  $(18,688)

 

The $167.2 million increase in cash used in investing activities in the first half of 2018 compared to the first half of 2017 was primarily due to increased net purchases of marketable securities of $117.1 million and higher cash expenditures for purchases of property and equipment of $53.3 million.

 

Financing Activities

 

   26-Weeks Ended 
   June 30,   July 1, 
(In thousands)  2018   2017 
Net cash used in financing activities  $(188,844)  $(248,914)

 

The $60.1 million decrease in cash used in financing activities during the first half of 2018 compared to the first half of 2017 was primarily due to decreased purchases of treasury stock under our share repurchase authorization of $64.0 million.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

 31 

 

 

Critical Accounting Policies and Estimates

 

General

 

Garmin’s discussion and analysis of its financial condition and results of operations are based upon Garmin’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The presentation of these financial statements requires Garmin to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Garmin evaluates its estimates, including those related to customer sales programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation. Garmin bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017. There were no material changes to the Company’s critical accounting policies and estimates in the 13-week and 26-week periods ended June 30, 2018, other than those discussed in Note 1, “Accounting Policies”.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017. There have been no material changes during the 13-week and 26-week periods ended June 30, 2018 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.

 

Item 4. Controls and Procedures

 

(a)   Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of June 30, 2018, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of June 30, 2018 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended June 30, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 32 

 

 

Part II - Other Information

 

Item 1. Legal Proceedings

 

The following information supplements and amends the discussion set forth under Part I, Item 3 "Legal Proceedings" in the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017 and the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2018.

 

PulseOn Oy v. Garmin (Europe) Ltd.

 

On February 21, 2018, PulseOn Oy filed an application with the Court of Appeal in England seeking leave to appeal the judgment of the Patent Court issued on January 18, 2018, holding that no accused Garmin products infringed either of the Registered Community Designs asserted by PulseOn Oy. The hearing before the Court of Appeal is scheduled to take place on January 30, 2019. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions, and complaints, including matters involving patent infringement, other intellectual property, product liability, customer claims and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters, or if not, what the impact might be. However, the Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s results of operations, financial position or cash flows.

 

Item 1A. Risk Factors

 

There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017, as amended and supplemented by the risk factors set forth below. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

The following is an amended and restated version of a Risk Factor included in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December 30, 2017:

 

Changes to trade regulations, including trade restrictions, sanctions, or tariffs, could significantly harm our results of operations.

 

A significant portion of our global and U.S. sales are comprised of goods assembled and manufactured in our facilities in Taiwan and the People’s Republic of China, and components for a number of our goods are sourced from suppliers in the People’s Republic of China. The imposition of additional U.S. or foreign governmental controls, regulations that create new or enhanced restrictions on free trade, trade sanctions, or tariffs, particularly those applicable to goods imported from Taiwan or the People’s Republic of China, could have substantial adverse effects on our business, results of operations, and financial condition.

 

 33 

 

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Items (a) and (b) are not applicable.

 

(c) Issuer Purchases of Equity Securities

 

The Board of Directors approved a share repurchase program on February 13, 2015, authorizing the Company to purchase up to $300 million of its common shares as market and business conditions warrant. In December 2016, the Board of Directors authorized an extension through December 31, 2017 to purchase remaining common shares. The share repurchase authorization expired on December 31, 2017 with no additional shares having been repurchased during the 26-weeks ended June 30, 2018. 

 

Item 3.Defaults Upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

Item 5.Other Information

 

Not applicable

  

Item 6.Exhibits

 

Exhibit 31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
     
Exhibit 31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
     
Exhibit 32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101.INS XBRL Instance Document
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema
   
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase
   
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

 34 

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GARMIN LTD.

 

  By /s/ Douglas G. Boessen
    Douglas G. Boessen
    Chief Financial Officer
    (Principal Financial Officer and
    Principal Accounting Officer)

 

Dated: August 1, 2018

 

 35 

 

 

INDEX TO EXHIBITS

 

Exhibit No.   Description
     
Exhibit 31.1   Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
     
Exhibit 31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
     
Exhibit 32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
Exhibit 32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101.INS XBRL Instance Document
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema
   
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase
   
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

 36