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GARMIN LTD - Quarter Report: 2019 September (Form 10-Q)

 

 

United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 28, 2019

 

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   98-0229227
(State or other jurisdiction   (I.R.S. Employer
of incorporation or organization)   identification no.)
     
Mühlentalstrasse 2    
8200 Schaffhausen    
Switzerland   N/A
(Address of principal executive offices)   (Zip Code)

 

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

 

Securities registered pursuant to Section 12(b) of the Act:

 

Registered Shares, CHF 0.10 Per Share Par Value   GRMN   The Nasdaq Stock Market, LLC
(Title of each class)   (Trading Symbol)   (Name of each exchange on which registered)

 

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 every Interactive Data File required to be submitted 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 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   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 October 28, 2019

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

 

 

 

 

 

 

Garmin Ltd.

Form 10-Q

Quarter Ended September 28, 2019

 

Table of Contents

 

      Page
         
Part I - Financial Information    
         
Item 1.   Condensed Consolidated Financial Statements   1
         
    Condensed Consolidated Balance Sheets at September 28, 2019 and December 29, 2018 (Unaudited)   1
         
    Condensed Consolidated Statements of Income for the 13-Weeks and 39-Weeks ended September 28, 2019 and September 29, 2018 (Unaudited)   2
         
    Condensed Consolidated Statements of Comprehensive Income for the  13-Weeks and 39-Weeks ended September 28, 2019  and September 29, 2018 (Unaudited)   3
         
    Condensed Consolidated Statements of Stockholders’ Equity for the  13-Weeks and 39-Weeks ended September 28, 2019  and September 29, 2018 (Unaudited)   4 - 5
         
    Condensed Consolidated Statements of Cash Flows for the  39-Weeks ended September 28, 2019 and September 29, 2018 (Unaudited)   6
         
    Notes to Condensed Consolidated Financial Statements (Unaudited)   7
         
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   20
         
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   30
         
Item 4.   Controls and Procedures   30
         
Part II - Other Information    
         
Item 1.   Legal Proceedings   31
         
Item 1A.   Risk Factors   31
         
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   31
         
Item 3.   Defaults Upon Senior Securities   31
         
Item 4.   Mine Safety Disclosures   31
         
Item 5.   Other Information   31
         
Item 6.   Exhibits   32
         
Signature Page   33
         
Index to Exhibits   34

 

i

 

 

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)

 

   September 28,   December 29, 
   2019   2018 
Assets        
Current assets:        
Cash and cash equivalents  $976,402   $1,201,732 
Marketable securities   300,542    182,989 
Accounts receivable, net   558,299    569,833 
Inventories   749,825    561,840 
Deferred costs   26,450    28,462 
Prepaid expenses and other current assets   146,325    120,512 
Total current assets   2,757,843    2,665,368 
           
Property and equipment, net   710,591    663,527 
Operating lease right-of-use assets   55,399    - 
           
Restricted cash   1,036    73 
Marketable securities   1,252,219    1,330,123 
Deferred income taxes   158,963    176,959 
Noncurrent deferred costs   25,156    29,473 
Intangible assets, net   637,716    417,080 
Other assets   156,182    100,255 
Total assets  $5,755,105   $5,382,858 
           
Liabilities and Stockholders’ Equity          
Current liabilities:          
Accounts payable  $235,548   $204,985 
Salaries and benefits payable   109,323    113,087 
Accrued warranty costs   37,998    38,276 
Accrued sales program costs   58,459    90,388 
Deferred revenue   95,572    96,372 
Accrued royalty costs   11,673    24,646 
Accrued advertising expense   21,246    31,657 
Other accrued expenses   87,333    69,777 
Income taxes payable   60,728    51,642 
Dividend payable   325,075    200,483 
Total current liabilities   1,042,955    921,313 
           
Deferred income taxes   113,225    92,944 
Noncurrent income taxes   105,309    127,211 
Noncurrent deferred revenue   69,600    76,566 
Noncurrent operating lease liabilities   42,855    - 
Other liabilities   267    1,850 
           
Stockholders’ equity:          
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 190,103 shares outstanding at September 28, 2019; and 189,461 shares outstanding at December 29, 2018;   17,979    17,979 
Additional paid-in capital   1,841,696    1,823,638 
Treasury stock   (368,187)   (397,692)
Retained earnings   2,868,816    2,710,619 
Accumulated other comprehensive income   20,590    8,430 
Total stockholders’ equity   4,380,894    4,162,974 
Total liabilities and stockholders’ equity  $5,755,105   $5,382,858 

 

See accompanying notes.

 

1

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

                             
   13-Weeks Ended   39-Weeks Ended 
   September 28,   September 29,   September 28,   September 29, 
   2019   2018   2019   2018 
Net sales  $934,383   $810,011   $2,655,273   $2,415,336 
                     
Cost of goods sold   366,925    329,264    1,060,752    984,783 
                     
Gross profit   567,458    480,747    1,594,521    1,430,553 
                     
Advertising expense   32,668    31,140    101,808    100,000 
Selling, general and administrative expense   124,769    114,669    380,289    352,234 
Research and development expense   148,561    138,979    443,361    422,649 
Total operating expense   305,998    284,788    925,458    874,883 
                     
Operating income   261,460    195,959    669,063    555,670 
                     
Other income (expense):                    
Interest income   12,309    11,089    39,748    32,310 
Foreign currency losses   (16,296)   (6,868)   (12,568)   (3,405)
Other income   294    1,147    3,567    6,800 
Total other income (expense)   (3,693)   5,368    30,747    35,705 
                     
Income before income taxes   257,767    201,327    699,810    591,375 
                     
Income tax provision   29,901    17,113    108,115    87,445 
                     
Net income  $227,866   $184,214   $591,695   $503,930 
                     
Net income per share:                    
Basic  $1.20   $0.98   $3.12   $2.67 
Diluted  $1.19   $0.97   $3.10   $2.66 
                     
Weighted average common shares outstanding:                    
Basic   190,102    188,799    189,853    188,554 
Diluted   190,962    190,005    190,790    189,586 

 

See accompanying notes.

 

2

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

                             
   13-Weeks Ended   39-Weeks Ended 
   September 28,   September 29,   September 28,   September 29, 
   2019   2018   2019   2018 
Net income  $227,866   $184,214   $591,695   $503,930 
Foreign currency translation adjustment   (18,885)   (3,940)   (27,805)   (30,308)
Change in fair value of available-for-sale marketable securities, net of deferred taxes   4,794    (1,168)   39,965    (21,044)
Comprehensive income  $213,775   $179,106   $603,855   $452,578 

 

See accompanying notes.

 

3

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the 13-Weeks Ended September 28, 2019 and September 29, 2018

(In thousands, except per share information)

Common Stock

Additional Paid-In Capital

Treasury Stock 

Retained Earnings

 Accumulated Other Comprehensive Income (Loss)

 

                   Accumulated     
       Additional           Other     
   Common   Paid-In   Treasury   Retained   Comprehensive     
   Stock   Capital   Stock   Earnings   Income (Loss)   Total 
Balance at June 30, 2018  $17,979   $1,828,515   $(433,959)  $2,336,614   $9,732   $3,758,881 
Net income               184,214        184,214 
Translation adjustment                   (3,940)   (3,940)
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $107                   (1,168)   (1,168)
Comprehensive income                            179,106 
Dividends declared                        
Issuance of treasury stock related to equity awards       (311)   693            382 
Stock compensation       14,347                14,347 
Purchase of treasury stock related to equity awards           (8)           (8)
Balance at September 29, 2018  $17,979   $1,842,551   $(433,274)  $2,520,828   $4,624   $3,952,708 

 

                   Accumulated     
       Additional           Other     
   Common   Paid-In   Treasury   Retained   Comprehensive     
   Stock   Capital   Stock   Earnings   Income (Loss)   Total 
Balance at June 29, 2019  $17,979   $1,825,135   $(368,200)  $2,641,371   $34,681   $4,150,966 
Net income               227,866        227,866 
Translation adjustment                   (18,885)   (18,885)
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $657                   4,794    4,794 
Comprehensive income                            213,775 
Dividends declared               (421)       (421)
Issuance of treasury stock related to equity awards       (30)   30             
Stock compensation       16,591                16,591 
Purchase of treasury stock related to equity awards           (17)           (17)
Balance at September 28, 2019  $17,979   $1,841,696   $(368,187)  $2,868,816   $20,590   $4,380,894 

 

See accompanying notes.

 

4

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited)

For the 39-Weeks Ended September 28, 2019 and September 29, 2018

(In thousands, except per share information)

 

                   Accumulated     
       Additional           Other     
   Common   Paid-In   Treasury   Retained   Comprehensive     
   Stock   Capital   Stock   Earnings   Income (Loss)   Total 
Balance at December 30, 2017  $17,979   $1,828,386   $(468,818)  $2,418,444   $56,428   $3,852,419 
Net income               503,930        503,930 
Translation adjustment                   (30,308)   (30,308)
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $3,014                   (21,044)   (21,044)
Comprehensive income                            452,578 
Dividends declared ($2.12 per share)               (400,298)       (400,298)
Issuance of treasury stock related to equity awards       (27,929)   42,453            14,524 
Stock compensation       42,094                42,094 
Purchase of treasury stock related to equity awards           (6,909)           (6,909)
Reclassification under ASU 2016-06               (1,700)       (1,700)
Reclassification under ASU 2018-02               452    (452)   - 
Balance at September 29, 2018  $17,979   $1,842,551   $(433,274)  $2,520,828   $4,624   $3,952,708 

 

                   Accumulated     
       Additional           Other     
   Common   Paid-In   Treasury   Retained   Comprehensive     
   Stock   Capital   Stock   Earnings   Income (Loss)   Total 
Balance at December 29, 2018  $17,979   $1,823,638   $(397,692)  $2,710,619   $8,430   $4,162,974 
Net income               591,695        591,695 
Translation adjustment                   (27,805)   (27,805)
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $5,968                   39,965    39,965 
Comprehensive income                            603,855 
Dividends declared ($2.28 per share)               (433,498)       (433,498)
Issuance of treasury stock related to equity awards       (29,495)   42,477            12,982 
Stock compensation       47,553                47,553 
Purchase of treasury stock related to equity awards           (12,972)           (12,972)
Balance at September 28, 2019  $17,979   $1,841,696   $(368,187)  $2,868,816   $20,590   $4,380,894 

 

See accompanying notes.

 

5

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

               
   39-Weeks Ended 
   September 28,   September 29, 
   2019   2018 
Operating activities:        
Net income  $591,695   $503,930 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   52,503    47,902 
Amortization   25,112    23,574 
Gain on sale or disposal of property and equipment   (5)   (491)
Provision for doubtful accounts   933    1,265 
Provision for obsolete and slow moving inventories   32,501    17,719 
Unrealized foreign currency loss   14,653    4,158 
Deferred income taxes   18,012    20,177 
Stock compensation expense   47,553    42,094 
Realized (gains) losses on marketable securities   (213)   481 
Changes in operating assets and liabilities, net of acquisitions:          
Accounts receivable   14,311    111,955 
Inventories   (210,622)   (69,139)
Other current and non-current assets   (86,538)   5,102 
Accounts payable   27,523    32,601 
Other current and non-current liabilities   (54,401)   (57,245)
Deferred revenue   (7,750)   (14,923)
Deferred costs   6,326    5,581 
Income taxes payable   (7,423)   27,041 
Net cash provided by operating activities   464,170    701,782 
           
Investing activities:          
Purchases of property and equipment   (91,469)   (122,846)
Proceeds from sale of property and equipment   370    1,296 
Purchase of intangible assets   (1,862)   (2,982)
Purchase of marketable securities   (333,320)   (314,179)
Redemption of marketable securities   333,783    229,066 
Acquisitions, net of cash acquired   (275,310)   (29,170)
Net cash used in investing activities   (367,808)   (238,815)
           
Financing activities:          
Dividends   (308,905)   (296,149)
Proceeds from issuance of treasury stock related to equity awards   12,982    14,524 
Purchase of treasury stock related to equity awards   (12,972)   (6,909)
Net cash used in financing activities   (308,895)   (288,534)
           
Effect of exchange rate changes on cash, cash equivalents, and restricted cash   (11,834)   (9,650)
           
Net (decrease) increase in cash, cash equivalents, and restricted cash   (224,367)   164,783 
Cash, cash equivalents, and restricted cash at beginning of period   1,201,805    891,759 
Cash, cash equivalents, and restricted cash at end of period  $977,438   $1,056,542 

 

See accompanying notes.

 

6

 

 

Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 28, 2019

(In thousands, except per share information)

 

1.

Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the Condensed Consolidated Financial Statements should be read in conjunction with Item 2 of Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week and 39-week periods ended September 28, 2019 are not necessarily indicative of the results that may be expected for the year ending December 28, 2019.

 

The Condensed Consolidated Balance Sheet at December 29, 2018 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the Consolidated Financial Statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 29, 2018.

 

The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended September 28, 2019 and September 29, 2018 both contain operating results for 13 weeks.

 

Recently Adopted Accounting Standards

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB subsequently issued Accounting Standards Update No. 2018-10 and Accounting Standards Update No. 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). Accounting Standards Update No. 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. The new lease standard requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet.

 

The Company adopted the new lease standard as of the beginning of the 2019 fiscal year using the optional transition method. The Company did not have a cumulative effect adjustment to retained earnings as a result of adopting the new lease standard and does not expect the new lease standard to have a material impact on the Company’s Consolidated Statements of Income or Consolidated Statements of Cash Flows in future periods. The Company elected the package of transitional practical expedients upon adoption which, among other provisions, allowed the Company to carry forward historical lease classification. See Note 11 – Leases for additional information regarding leases.

 

7

 

 

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 29, 2018. Other than the policy discussed below, there were no material changes to the Company’s significant accounting policies during the 39-week period ended September 28, 2019.

 

Preproduction Costs Related to Long-Term Supply Arrangements

 

Preproduction design and development costs related to long-term supply arrangements are expensed as incurred, and classified as Research and development, unless the customer has provided a contractual guarantee for reimbursement of such costs. Contractually reimbursable costs are capitalized as incurred in the Condensed Consolidated Balance Sheets within Prepaid expenses and other current assets if reimbursement is expected to be received within one year, or within Other assets if expected to be received beyond one year. Such capitalized costs were approximately $22 million as of September 28, 2019, and there were no such capitalized costs as of December 29, 2018.

 

2.Inventories

 

The components of inventories consist of the following:

 

Schedule of inventories        
  September 28,   December 29, 
   2019   2018 
         
Raw materials  $267,718   $205,696 
Work-in-process   133,290    96,564 
Finished goods   348,817    259,580 
Inventories  $749,825   $561,840 

 

3.

Earnings Per Share

 

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

 

Schedule of computation of basic and diluted net income per share              
   13-Weeks Ended 
   September 28,   September 29, 
   2019   2018 
Numerator:        
Numerator for basic and diluted net income per share - net income  $227,866   $184,214 
           
Denominator:          
Denominator for basic net income per share – weighted-average common shares   190,102    188,799 
           
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units   860    1,206 
           
Denominator for diluted net income per share – adjusted weighted-average common shares   190,962    190,005 
           
Basic net income per share  $1.20   $0.98 
           
Diluted net income per share  $1.19   $0.97 

  

8

 

 

               
   39-Weeks Ended 
   September 28,   September 29, 
   2019   2018 
Numerator:        
Numerator for basic and diluted net income per share - net income  $591,695   $503,930 
           
Denominator:          
Denominator for basic net income per share – weighted-average common shares   189,853    188,554 
           
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units   937    1,032 
           
Denominator for diluted net income per share – adjusted weighted-average common shares   190,790    189,586 
           
Basic net income per share  $3.12   $2.67 
           
Diluted net income per share  $3.10   $2.66  

  

There were 398 and 266 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week and 39-week periods ended September 28, 2019, respectively, and no anti-dilutive equity awards outstanding during the 13-week and 39-week periods ended September 29, 2018.

 

There were less than 1 net shares issued as a result of exercises and releases of equity awards for the 13-week period ended September 28, 2019, and there were 12 net shares issued as a result of exercises and releases of equity awards for the 13-week period ended September 29, 2018.

 

There were 396 and 390 net shares issued as a result of exercises and releases of equity awards for the 39-week periods ended September 28, 2019 and September 29, 2018, respectively.

 

There were 245 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 39-week period ended September 28, 2019.

 

There were 230 ESPP shares issued from outstanding Treasury stock during the 39-week period ended September 29, 2018.

 

4.Segment Information

 

The Company has identified five reportable segments – auto, aviation, fitness, marine, and outdoor. The Company’s Chief Executive Officer, who has been identified as the Chief Operating Decision Maker (CODM), uses operating income as the measure of profit or loss to assess segment performance and allocate resources. Operating income represents net sales less costs of goods sold and operating expenses. Net sales are directly attributed to each segment. Most costs of goods sold and the majority of operating expenses are also directly attributed to each segment, while certain other costs of goods sold and operating expenses are allocated to the segments in a manner appropriate to the specific facts and circumstances of the expenses being allocated.

 

In the first quarter of fiscal 2019, the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined, endeavoring to provide the Company’s CODM with a more meaningful representation of segment profit or loss in light of the evolution of its segments. The Company’s composition of operating segments and reportable segments did not change. Prior year amounts are presented here as they were originally reported, as it is not practicable to accurately restate prior period activity in accordance with the refined allocation methodology. For comparative purposes, we estimate operating income for the 13-weeks ended September 29, 2018 would have been approximately $4 million less for the aviation segment, approximately $2 million more for the marine segment, approximately $2 million more for the outdoor segment, and not significantly different for the auto and fitness segments. We estimate operating income for the 39-weeks ended September 29, 2018 would have been approximately $13 million less for the aviation segment, approximately $10 million more for the marine segment, approximately $3 million more for the outdoor segment, and not significantly different for the auto and fitness segments.

 

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Net sales (“revenue”), gross profit, and operating income for each of the Company’s reportable segments are presented below.

 

Net sales (“revenue”), gross profit, and operating income    Outdoor [Member]       Fitness [Member]       Marine [Member]       Auto [Member]        Aviation [Member]         
   Reportable Segments 
   Outdoor   Fitness   Marine   Auto   Aviation   Total 
                         
13-Weeks Ended September 28, 2019                    
                         
Net sales  $258,294   $243,099   $107,694   $137,722   $187,574   $934,383 
Gross profit   170,846    126,835    64,275    65,814    139,688    567,458 
Operating income   105,051    49,831    20,008    20,857    65,713    261,460 
                               
13-Weeks Ended  September 29, 2018                          
                               
Net sales  $209,415   $190,185   $98,770   $165,214   $146,427   $810,011 
Gross profit   136,671    103,441    58,508    70,925    111,202    480,747 
Operating income   78,972    37,378    13,908    15,032    50,669    195,959 
                               
39-Weeks Ended  September 28, 2019                          
                               
Net sales  $622,748   $675,007   $393,070   $422,132   $542,316   $2,655,273 
Gross profit   403,842    352,805    234,014    198,012    405,848    1,594,521 
Operating income   218,340    118,369    88,212    53,978    190,164    669,063 
                               
39 -Weeks Ended September 29, 2018                          
                               
Net sales  $555,314   $581,315   $346,908   $486,653   $445,146   $2,415,336 
Gross profit   358,829    326,473    203,976    207,389    333,886    1,430,553 
Operating income   194,711    123,299    54,806    31,113    151,741    555,670 

 

Net sales to external customers by geographic region were as follows for the 13-week and 39-week periods ended September 28, 2019 and September 29, 2018. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:

 

Americas [Member]

EMEA [Member]

APAC [Member]

Schedule of net sales and property and equipment, net by geographic area 

     
   13-Weeks Ended   39-Weeks Ended 
   September 28,   September 29,   September 28,   September 29, 
   2019   2018   2019   2018 
Americas  $439,113   $370,239   $1,289,409   $1,153,330 
EMEA   344,010    307,087    942,625    862,116 
APAC   151,260    132,685    423,239    399,890 
Net sales to external customers  $934,383   $810,011   $2,655,273   $2,415,336 

 

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Net property and equipment by geographic region as of September 28, 2019 and September 29, 2018 are presented below.

 

                 
   Americas   APAC   EMEA   Total 
September 28, 2019                
Property and equipment, net  $431,062   $217,184   $62,345   $710,591 
                     
September 29, 2018                    
Property and equipment, net  $403,556   $202,790   $44,459   $650,805 

 

5.Warranty Reserves

 

Warranty Reserves Textual

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

 

Schedule of changes in the aggregate warranty reserve              
   13-Weeks Ended 
   September 28,   September 29, 
   2019   2018 
         
Balance - beginning of period  $39,330   $38,429 
Accrual for products sold during the period(1)   12,981    13,558 
Expenditures   (14,313)   (16,027)
Balance - end of period  $37,998   $35,960 

 

               
   39-Weeks Ended 
   September 28,   September 29, 
   2019   2018 
         
Balance - beginning of period  $38,276   $36,827 
Accrual for products sold during the period(1)   41,196    40,682 
Expenditures   (41,474)   (41,549)
Balance - end of period  $37,998   $35,960 

 

(1)Changes in cost estimates related to pre-existing warranties are not material and aggregated with accruals for new warranty contracts in the ‘accrual for products sold during the period’ line.

 

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 September 28, 2019 was approximately $467,300. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

 

Contingencies

 

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

 

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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 September 28, 2019. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.

 

The Company settled or resolved certain matters during the 13-week and 39-week periods ended September 28, 2019 that did not individually or in the aggregate have a material impact on the Company’s business or its consolidated financial position, results of operations or cash flows.

 

7.Income Taxes

 

The Company recorded income tax expense of $29,901 in the 13-week period ended September 28, 2019, compared to income tax expense of $17,113 in the 13-week period ended September 29, 2018. The effective tax rate was 11.6% in the third quarter of 2019, compared to 8.5% in the third quarter of 2018. The 310 basis points increase to the third quarter of 2019 effective tax rate compared to the prior year quarter is primarily due to a decrease in uncertain tax position reserves released due to expiring statutes of limitations in the third quarter of 2019 compared to the third quarter of 2018.

 

The Company recorded income tax expense of $108,115 in the first three quarters of 2019, compared to income tax expense of $87,445 in the first three quarters of 2018. The effective tax rate was 15.4% in the first three quarters of 2019, compared to 14.8% in the first three quarters of 2018.

 

8.Marketable Securities

 

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

 

Level 1Unadjusted quoted prices in active markets for the identical asset or liability

 

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Level 2Observable 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 3Unobservable inputs for the asset or liability

 

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.

 

The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date. 

 

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

 

U.S.Treasury Securities [Member]

Agency Securities [Member]

Mortgage-Backed Securities [Member]

Corporate Securities [Member]

Municipal Securities [Member]

Other [Member]

Recurring Basis [Member] 

Schedule of available-for-sale securities    
   Fair Value Measurements as
of September 28, 2019
 
   Total   Level 1   Level 2   Level 3 
U.S. Treasury securities  $16,557   $-   $16,557   $- 
Agency securities   67,926    -    67,926    - 
Mortgage-backed securities   129,564    -    129,564    - 
Corporate securities   1,066,438    -    1,066,438    - 
Municipal securities   158,530    -    158,530    - 
Other   113,746    -    113,746    - 
Total  $1,552,761   $-   $1,552,761   $- 

 

   Fair Value Measurements as
of December 29, 2018
   Total   Level 1   Level 2   Level 3 
U.S. Treasury securities  $22,128   $-   $22,128   $- 
Agency securities   59,116    -    59,116    -  
Mortgage-backed securities   135,865    -    135,865    - 
Corporate securities   980,524    -    980,524    - 
Municipal securities   173,137    -    173,137    - 
Other   142,342    -    142,342    - 
Total  $1,513,112   $-   $1,513,112   $- 

 

13

 

 

Marketable securities classified as available-for-sale securities are summarized below:

 

Schedule of marketable securities classified as available-for-sale securities                              
   Available-For-Sale Securities as
of September 28, 2019
 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
U.S. Treasury securities  $16,633   $3   $(79)  $16,557 
Agency securities   67,875    130    (79)   67,926 
Mortgage-backed securities   131,507    174    (2,117)   129,564 
Corporate securities   1,061,714    8,965    (4,241)   1,066,438 
Municipal securities   157,456    1,173    (99)   158,530 
Other   114,106    129    (489)   113,746 
Total  $1,549,291   $10,574   $(7,104)  $1,552,761 

 

   Available-For-Sale Securities as
of December 29, 2018
 
   Amortized Cost   Gross Unrealized Gains   Gross Unrealized Losses   Fair Value 
U.S. Treasury securities  $22,485   $-   $(357)  $22,128 
Agency securities   60,088    28    (1,000)   59,116 
Mortgage-backed securities   142,176    1    (6,312)   135,865 
Corporate securities   1,010,590    33    (30,099)   980,524 
Municipal securities   175,630    73    (2,566)   173,137 
Other   144,606    0    (2,264)   142,342 
Total  $1,555,575   $135   $(42,598)  $1,513,112 

 

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

 

The Company recognizes the credit component of other-than-temporary impairments of debt securities in “Other Income” and the noncredit component in “Other comprehensive income (loss)” for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During 2018 and the 39-week period ended September 28, 2019, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and fair value of the securities at an unrealized loss position as of September 28, 2019 were $626,766 and $619,662, respectively. Approximately 44% of securities in our portfolio were at an unrealized loss position as of September 28, 2019. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no material deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no material impairment has been recorded in the accompanying Condensed Consolidated Statements of Income.

 

14

 

 

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 September 28, 2019 and December 29, 2018.

 

Schedule of gross unrealized losses and fair value by major security type                            
   As of September 28, 2019 
   Less than 12 Consecutive Months   12 Consecutive Months or Longer 
   Gross Unrealized Losses   Fair Value   Gross Unrealized Losses   Fair Value 
U.S. Treasury securities  $(0)  $1,690   $(79)  $14,464 
Agency securities   (10)   5,988    (69)   30,753 
Mortgage-backed securities   (149)   17,478    (1,968)   93,550 
Corporate securities   (672)   163,205    (3,569)   191,739 
Municipal securities   (59)   24,305    (40)   15,022 
Other   (141)   27,181    (348)   34,287 
Total  $(1,031)  $239,847   $(6,073)  $379,815 

 

   As of December 29, 2018 
   Less than 12 Consecutive Months   12 Consecutive Months or Longer 
   Gross Unrealized Losses   Fair Value   Gross Unrealized Losses   Fair Value 
U.S. Treasury securities  $(3)  $3,975   $(354)  $18,153 
Agency securities   (5)   4,656    (995)   40,508 
Mortgage-backed securities   (1)   361    (6,311)   135,323 
Corporate securities   (4,028)   323,633    (26,071)   640,439 
Municipal securities   (454)   38,371    (2,112)   118,362 
Other   (102)   8,015    (2,162)   114,120 
Total  $(4,593)  $379,011   $(38,005)  $1,066,905 

 

The amortized cost and fair value of marketable securities at September 28, 2019, by maturity, are shown below.

 

Schedule of amortized cost and estimated fair value of marketable securities by contractual maturity        
   Amortized Cost   Fair Value 
Due in one year or less  $300,566   $300,542 
Due after one year through five years   1,061,239    1,066,607 
Due after five years through ten years   174,371    172,546 
Due after ten years   13,115    13,066 
   $1,549,291   $1,552,761 

 

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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 39-week periods ended September 28, 2019:

 

Schedule of changes in accumulated other comprehensive income (AOCI)    
   13-Weeks Ended September 28, 2019 
   Foreign Currency Translation Adjustment   Net unrealized gains (losses) on available-for-sale securities   Total 
Beginning Balance  $38,407   $(3,726)  $34,681 
Other comprehensive income before reclassification, net of income tax expense of $657   (18,885)   4,933    (13,952)
Amounts reclassified from accumulated other comprehensive income   -    (139)   (139)
Net current-period other comprehensive income   (18,885)   4,794    (14,091)
Ending Balance  $19,522   $1,068   $20,590 

 

   39-Weeks Ended September 28, 2019 
   Foreign Currency Translation Adjustment   Net unrealized gains (losses) on available-for-sale securities   Total 
Beginning Balance  $47,327   $(38,897)  $8,430 
Other comprehensive income before reclassification, net of income tax expense of $5,968   (27,805)   40,180    12,375 
Amounts reclassified from accumulated other comprehensive income   -    (215)   (215)
Net current-period other comprehensive income   (27,805)   39,965    12,160 
Ending Balance  $19,522   $1,068   $20,590 

 

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 39-week periods ended September 28, 2019:

 

Accumulated Net Investment Gain (Loss) Attributable to Parent Reclassification from Accumulated Other Comprehensive Income [Member]

Schedule of of reporting reclassifications out of AOCI            
13-Weeks Ended September 28, 2019
Details About Accumulated Other Comprehensive Income Components  Amount Reclassified from Accumulated Other Comprehensive Income   Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains (losses) on available-for-sale securities  $153   Other income (expense)
    (14)  Income tax benefit (provision)
   $139   Net of tax

 

39-Weeks Ended September 28, 2019
Details About Accumulated Other Comprehensive Income Components  Amount Reclassified from Accumulated Other Comprehensive Income   Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains (losses) on available-for-sale securities  $213   Other income (expense)
    2   Income tax benefit (provision)
   $215   Net of tax

 

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 10.

Revenue

 

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

 

Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is presented in Note 4 – Segment Information. The Company has identified six major product categories – auto PND, auto OEM, aviation, fitness, marine, and outdoor. Note 4 contains disaggregated revenue information of the aviation, fitness, marine, and outdoor major product categories. Auto segment revenue presented in Note 4 is comprised of the auto PND and auto OEM major product categories, as depicted below.

 

Auto PND [Member]

Auto OEM [Member]

Schedule of disaggregated revenue by geographic region    
   Auto Revenue by Major Product Category 
   13-Weeks Ended   39-Weeks Ended 
   September 28,   September 29,   September 28,   September 29, 
   2019   2018   2019   2018 
Auto PND   69%   64%   66%   66%
Auto OEM   31%   36%   34%   34%

 

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:

 

Point in time [Member]

Over time [Member]

 Schedule of revenue disaggregated                            
   13-Weeks Ended   39-Weeks Ended 
   September 28,   September 29,   September 28,   September 29, 
   2019   2018   2019   2018 
Point in time  $886,954   $761,216   $2,522,229   $2,286,740 
Over time   47,429    48,795    133,044    128,596 
Net sales  $934,383   $810,011   $2,655,273   $2,415,336 

 

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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 39-week period ending September 28, 2019 are presented below:

 

Schedule of deferred revenue and costs    Deferred Revenue(1)       Deferred Costs(2) 
   39-Weeks Ended 
   September 28, 
   2019 
   Deferred Revenue(1)   Deferred Costs(2) 
Balance, beginning of period  $172,938   $57,935 
Deferrals in period   125,278    20,284 
Recognition of deferrals in period   (133,044)   (26,613)
Balance, end of period  $165,172   $51,606 

 

(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 $133,044 of deferred revenue recognized in the 39-weeks ended September 28, 2019, $78,092 was deferred as of the beginning of the period.

 

Approximately two-thirds of the $165,172 of deferred revenue at the end of the period, September 28, 2019, is recognized ratably over a period of three years or less.

 

11.Leases

 

Leases Textual

The Company leases certain real estate properties, vehicles, and equipment in various countries around the world. Leased properties are typically used for office space, distribution, and retail. The Company’s leases are classified as operating leases with remaining terms of 1 to 34 years, some of which include an option to extend or renew. If the exercise of an option to extend or renew is determined to be reasonably certain, the associated right-of-use asset and lease liability reflects the extended period and payments. For all real estate leases, any non-lease components, including common area maintenance, have been separated from lease components and excluded from the associated right-of-use asset and lease liability calculations. For all equipment and vehicle leases, an accounting policy election has been made to not separate lease and non-lease components.

 

Leases with an initial term of 12 months or less (“short-term leases”) are not recognized on the Company’s Condensed Consolidated Balance Sheets as a right-of-use asset or lease liability.

 

The following table represents lease costs recognized in the Company’s Condensed Consolidated Statements of Income for the 13-weeks and 39-weeks ended September 28, 2019. Lease costs are included in Selling, general and administrative expense and Research and development expense on the Company’s Condensed Consolidated Statements of Income.

  

Schedule of operating lease cost            
    13-Weeks Ended     39-Weeks Ended  
 
 
 
 
September 28,  
 
 
September 28,  
 
   2019   2019 
Operating lease cost(1)  $6,023   $17,683 

 

(1)Operating lease cost includes short-term lease costs and variable lease costs, which were not material in the periods presented.

 

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The following table represents the components of leases that are recognized on the Company’s Condensed Consolidated Balance Sheets as of September 28, 2019.

  

Schedule of amounts recognized in balance sheet    
   September 28, 
   2019 
Operating lease right-of-use assets  $55,399 
      
Other accrued expenses  $13,438 
Noncurrent operating lease liabilities   42,855 
Total lease liabilities  $56,293 
      
Weighted average remaining lease term  5.6 years 
Weighted average discount rate   4.0%

 

The following table represents the maturity of lease liabilities.

 

Schedule of maturity of lease liabilities    
Fiscal Year  Lease payments 
2019, excluding the 39-weeks ended September 28, 2019  $4,347 
2020   15,447 
2021   12,259 
2022   8,736 
2023   7,955 
Thereafter   15,389 
Total  $64,133 
Less: imputed interest   (7,840)
Present value of lease liabilities  $56,293 

 

The following table presents supplemental cash flow and noncash information related to leases.

 

Schedule of cash flow supplemental    
   39-Weeks Ended 
   September 28, 
   2019 
Cash paid for amounts included in the measurement of operating lease liabilities(2)  $13,528 
Right-of-use assets obtained in exchange for new operating lease liabilities  $7,853 

 

(2)Included in Net cash provided by operating activities on the Company’s Condensed Consolidated Statements of Cash Flows.

  

12.Recently Issued Accounting Pronouncements Not Yet Adopted

 

Financial Instruments – Credit Losses

 

In June 2016, the FASB issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 provides new guidance on assessment of expected credit losses of certain financial instruments. ASU 2016-13 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its Consolidated Financial Statements.

 

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.

 

13. Subsequent Events

 

Switzerland corporate tax reform was approved by public referendum in May 2019 and enacted in October 2019. Accordingly, the Company expects to record an income tax benefit of approximately $20 to $220 million in the fourth quarter of 2019 due to an increase in certain Switzerland deferred tax assets resulting from enactment of Switzerland Federal and Schaffhausen cantonal tax reform. The Company is evaluating transitional measures in Switzerland tax law that may affect the overall increase in deferred tax assets as well as the impact of tax reform to its ongoing effective tax rate, the materiality of which is not yet known.

 

19

 

 

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 29, 2018. 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 29, 2018.

 

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

 

20

 

 

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 
   September 28,
2019
   September 29,
2018
 
Net sales   100%   100%
Cost of goods sold   39%   41%
Gross profit   61%   59%
Advertising expense   3%   4%
Selling, general and administrative expense   13%   14%
Research and development expense   16%   17%
Total operating expense   33%   35%
Operating income   28%   24%
Other income (expense)   (0)%   1%
Income before income taxes   28%   25%
Income tax provision   3%   2%
Net income   24%   23%

  

   39-Weeks Ended 
   September 28,
2019
   September 29,
2018
 
Net sales   100%   100%
Cost of goods sold   40%   41%
Gross profit   60%   59%
Advertising expense   4%   4%
Selling, general and administrative expense   14%   15%
Research and development expense   17%   17%
Total operating expense   35%   36%
Operating income   25%   23%
Other income (expense)   1%   1%
Income before income taxes   26%   24%
Income tax provision   4%   4%
Net income   22%   21%

 

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.

 

As indicated in Note 4 to the Condensed Consolidated Financial Statements, the methodology used to allocate certain selling, general, and administrative expenses was refined in the first quarter of 2019. The amounts presented below for the 13-weeks and 39-weeks ended September 29, 2018 are presented here as they were originally reported.

 

21

 

 

Comparison of 13-Weeks ended September 28, 2019 and September 29, 2018

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

 

Net Sales

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Net Sales   % of Total   Net Sales   % of Total   $ Change   % Change 
Outdoor  $258,294    28%  $209,415    26%  $48,879    23%
Fitness   243,099    26%   190,185    24%   52,914    28%
Marine   107,694    11%   98,770    12%   8,924    9%
Auto   137,722    15%   165,214    20%   (27,492)   (17)%
Aviation   187,574    20%   146,427    18%   41,147    28%
Total  $934,383    100%  $810,011    100%  $124,372    15%

 

Net sales increased 15% for the 13-week period ended September 28, 2019 when compared to the year-ago quarter. The outdoor, fitness, marine, and aviation segments collectively increased by 24%, contributing 85% of total revenue. Outdoor was the largest portion of our revenue mix at 28% in the third quarter of 2019 compared to 26% in the third quarter of 2018.

 

Total unit sales in the third quarter of 2019 increased to 3,659 when compared to total unit sales of 3,527 in the third quarter of 2018.

 

Outdoor, fitness, marine, and aviation segment revenue increased 23%, 28%, 9%, and 28%, respectively, when compared to the year-ago quarter. The outdoor segment revenue increase was driven by sales growth in multiple product categories, led primarily by adventure watches. The fitness segment revenue increase was primarily driven by strong sales in wearables and sales from Tacx, a newly acquired group of subsidiaries that designs and manufactures indoor bike trainers. The current quarter marine segment revenue increase was driven by sales growth in multiple product categories, led primarily by chartplotters. The aviation segment revenue increase was driven by sales growth in both OEM and aftermarket categories. Auto segment revenue decreased 17% from the year-ago quarter, primarily due to lower OEM sales in the current quarter and the ongoing PND market contraction.

 

Gross Profit

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Gross Profit   % of Revenue   Gross Profit   % of Revenue   $ Change   % Change 
Outdoor  $170,846    66%  $136,671    65%  $34,175    25%
Fitness   126,835    52%   103,441    54%   23,394    23%
Marine   64,275    60%   58,508    59%   5,767    10%
Auto   65,814    48%   70,925    43%   (5,111)   (7)%
Aviation   139,688    74%   111,202    76%   28,486    26%
Total  $567,458    61%  $480,747    59%  $86,711    18%

 

Gross profit dollars in the third quarter of 2019 increased 18%, primarily due to growth in net sales along with a gross margin increase of 140 basis points compared to the year-ago quarter. Gross margin increased in the auto segment, was relatively flat in the outdoor and marine segments, and decreased in the fitness and aviation segments when compared to the year-ago quarter.

 

The auto segment gross margin increase of 490 basis points was primarily attributable to lower license expense. A portion of license expense favorability in the auto segment is expected to continue for the remainder of the year. Gross margin remained relatively flat within the outdoor and marine segments. The fitness and aviation segment gross margin decreases were primarily attributable to product mix.

 

22

 

 

Advertising Expense

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Advertising   % of   Advertising   % of             
   Expense   Revenue   Expense   Revenue   $ Change   % Change 
Outdoor  $11,327         4%  $9,455         5%  $1,872    20%
Fitness   13,403    6%   12,296    6%   1,107    9%
Marine   3,875    4%   3,594    4%   281    8%
Auto   2,874    2%   4,180    3%   (1,306)   (31)%
Aviation   1,189    1%   1,615    1%   (426)   (26)%
Total  $32,668    3%  $31,140    4%  $1,528    5%

 

Advertising expense as a percent of revenue was relatively flat when compared to the year-ago quarter and increased 5% in absolute dollars. The total absolute dollar increase was primarily attributable to increased cooperative advertising in the outdoor, fitness, and marine segments, partially offset by decreased cooperative advertising in the auto and aviation segments.

 

Selling, General and Administrative Expense

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Selling, General &   % of   Selling, General &   % of             
   Admin. Expenses   Revenue   Admin. Expenses   Revenue   $ Change   % Change 
Outdoor  $32,679         13%  $31,240    15%  $1,439    5%
Fitness   37,119    15%   31,370    16%   5,749    18%
Marine   20,232    19%   21,704    22%   (1,472)   (7)%
Auto   17,818    13%   21,418    13%   (3,600)   (17)%
Aviation   16,921    9%   8,937    6%   7,984    89%
Total  $124,769    13%  $114,669    14%  $10,100    9%

 

Selling, general and administrative expense increased 9% in absolute dollars and was relatively flat as a percent of revenue compared to the year-ago quarter. The absolute dollar increase in the third quarter of 2019 was primarily attributable to personnel costs and expenses from recent acquisitions. The fitness segment decrease as a percent of revenue was primarily due to greater leverage of operating costs.

 

As noted above and in Note 4 to the Condensed Consolidated Financial Statements, the Company refined its methodology to allocate certain selling, general and administrative expenses in the beginning of the 2019 fiscal year. The prior year amounts are presented here as originally reported. For comparative purposes, we estimate selling, general and administrative expenses for the third quarter of 2018 would have been approximately $4 million more for the aviation segment, approximately $2 million less for the marine segment, approximately $2 million less for the outdoor segment, and not significantly different for the fitness and auto segments. Selling, general and administrative expense as a percent of revenue also decreased in the outdoor and marine segments due to greater leverage of operating costs.

 

Considering the refined allocation methodology noted above, we estimate selling, general and administrative expenses for the 52-weeks ended December 29, 2018 would have been approximately $18 million more for the aviation segment, approximately $11 million less for the marine segment, approximately $7 million less for the outdoor segment, and not significantly different for the fitness and auto segments.

 

Research and Development Expense

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Research &   % of   Research &   % of             
   Development   Revenue   Development   Revenue   $ Change   % Change 
Outdoor  $21,789         8%  $17,004    8%  $4,785    28%
Fitness   26,482    11%   22,397    12%   4,085    18%
Marine   20,160    19%   19,302    20%   858    4%
Auto   24,265    18%   30,295    18%   (6,030)   (20)%
Aviation   55,865    30%   49,981    34%   5,884    12%
Total  $148,561    16%  $138,979    17%  $9,582    7%

 

23

 

 

Research and development expense as a percent of revenue decreased 130 basis points when compared to the year-ago quarter and increased 7% in absolute dollars. The absolute dollar increase was primarily due to higher engineering personnel costs related to wearable and aviation product offerings and expenses resulting from recent acquisitions, partially offset by the capitalization of certain contractually reimbursable preproduction design and development personnel costs within the auto segment. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

Operating Income

 

   13-Weeks Ended
September 28, 2019
   13-Weeks Ended
September 29, 2018
   Year over Year 
   Operating Income   % of Revenue   Operating Income   % of Revenue   $ Change   % Change 
Outdoor  $105,051    41%  $78,972    38%  $26,079    33%
Fitness   49,831    20%   37,378    20%   12,453    33%
Marine   20,008    19%   13,908    14%   6,100    44%
Auto   20,857    15%   15,032    9%   5,825    39%
Aviation   65,713    35%   50,669    35%   15,044    30%
Total  $261,460    28%  $195,959    24%  $65,501    33%

   

Operating income increased 33% in absolute dollars and 380 basis points as a percent of revenue when compared to the year-ago quarter. In the current quarter, the operating income growth in absolute dollars and as a percent of revenue was primarily attributable to revenue growth, improved gross margin, and greater leverage of operating expenses, as discussed above.

 

Other Income (Expense)

 

   13-Weeks Ended   13-Weeks Ended 
   September 28, 2019   September 29, 2018 
Interest income  $12,309   $11,089 
Foreign currency losses   (16,296)   (6,868)
Other   294    1,147 
Total  $(3,693)  $5,368 

  

The average return on cash and investments, including interest and capital gains/losses, during the third quarter of 2019 was 2.0% compared to 1.8% during the same quarter of 2018. 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.

 

The $16.3 million currency loss recognized in the third quarter of 2019 was primarily due to the U.S. Dollar strengthening against the Euro and British Pound Sterling, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar, within the 13-weeks ended September 28, 2019. During this period, the U.S. Dollar strengthened 3.8% against the Euro and 3.2% against the British Pound Sterling, resulting in losses of $9.8 million and $1.5 million, respectively, while the U.S. Dollar strengthened 0.3% against the Taiwan Dollar, resulting in a gain of $1.2 million. The remaining net currency loss of $6.2 million was related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

The $6.9 million currency loss recognized in the third quarter of 2018 was primarily due to the strengthening of the U.S. Dollar against the Euro and British Pound Sterling within the 13-weeks ended September 29, 2018. During this period, the U.S. Dollar strengthened 0.7% against the Euro and 1.3% against the British Pound Sterling, resulting in losses of $2.7 million and $0.6 million, respectively, while the U.S. Dollar remained relatively flat against the Taiwan Dollar. The remaining net currency loss of $3.6 million was related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

24

 

 

Income Tax Provision

 

The Company recorded income tax expense of $29.9 million in the 13-week period ended September 28, 2019, compared to income tax expense of $17.1 million in the 13-week period ended September 29, 2018. The effective tax rate was 11.6% in the third quarter of 2019, compared to 8.5% in the third quarter of 2018. The 310 basis points increase to the third quarter of 2019 effective tax rate compared to the prior year quarter is primarily due to a decrease in uncertain tax position reserves released due to expiring statutes of limitations in the third quarter of 2019 compared to the third quarter of 2018.

 

As discussed in Note 13 to the Condensed Consolidated Financial Statements, Switzerland corporate tax reform was approved by public referendum in May 2019 and enacted in October 2019. Accordingly, the Company expects to record an income tax benefit of approximately $20 to $220 million in the fourth quarter of 2019 due to an increase in certain Switzerland deferred tax assets resulting from enactment of Switzerland Federal and Schaffhausen cantonal tax reform. The Company is evaluating transitional measures in Switzerland tax law that may affect the overall increase in deferred tax assets as well as the impact of tax reform to its ongoing effective tax rate, the materiality of which is not yet known.

 

Net Income

 

As a result of the above, net income for the 13-weeks ended September 28, 2019 was $227.9 million compared to $184.2 million for the 13-week period ended September 28, 2018, an increase of $43.7 million.

 

Comparison of 39-Weeks Ended September 28, 2019 and 39-Weeks Ended September 29, 2018

 

Net Sales

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Net Sales   % of Total   Net Sales   % of Total   $ Change   % Change 
Outdoor  $622,748    24%  $555,314    23%  $67,434    12%
Fitness   675,007    25%   581,315    24%   93,692    16%
Marine   393,070    15%   346,908    14%   46,162    13%
Auto   422,132    16%   486,653    20%   (64,521)   (13)%
Aviation   542,316    20%   445,146    19%   97,170    22%
Total  $2,655,273    100%  $2,415,336    100%  $239,937    10%

  

Net sales increased 10% for the 39-week period ended September 28, 2019 when compared to the year-ago period. The outdoor, fitness, marine, and aviation segments collectively increased by 16%, contributing 84% of total revenue. Fitness was the largest portion of our revenue mix at 25% in the first three quarters of 2019 compared to 24% in the first three quarters of 2018.

 

Total unit sales in the first three quarters of 2019 increased to 10,678 when compared to the total unit sales of 10,266 in the first three quarters of 2018.

 

Outdoor, fitness, marine, and aviation segment revenues increased 12%, 16%, 13%, and 22%, respectively, when compared to the year-ago period. The outdoor segment revenue increase was primarily driven by strong sales in adventure watches, golf and inReach product lines. Fitness segment revenue increases were primarily driven by strong sales in wearables and sales from newly acquired Tacx. Marine segment revenue increases were driven by sales growth in multiple product categories, led primarily by chartplotters and sonar products. The aviation segment revenue increase was driven by sales growth in both OEM and aftermarket categories. Auto segment revenue decreased 13% from the year-ago period, primarily due to the ongoing PND market contraction.

 

25

 

 

Gross Profit

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Gross Profit   % of Revenue   Gross Profit   % of Revenue   $ Change   % Change 
Outdoor  $403,842    65%  $358,829    65%  $45,013    13%
Fitness   352,805    52%   326,473    56%   26,332    8%
Marine   234,014    60%   203,976    59%   30,038    15%
Auto   198,012    47%   207,389    43%   (9,377)   (5)%
Aviation   405,848    75%   333,886    75%   71,962    22%
Total  $1,594,521    60%  $1,430,553    59%  $163,968    11%

 

Gross profit dollars in the 39-week period ended September 28, 2019 increased 11% while gross margin remained relatively flat compared to the year-ago period. Gross margin increased 430 basis points in the auto segment when compared to the year-ago period, primarily attributable to lower license expense and product mix. A portion of license expense favorability in the auto segment is expected to continue for the remainder of the year. Gross margin remained relatively flat within the outdoor, marine, and aviation segments. Gross margin decreased in the fitness segment primarily due to lower average selling prices and product mix.

 

Advertising Expense

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Advertising   % of   Advertising   % of             
   Expense   Revenue   Expense   Revenue   $ Change   % Change 
Outdoor  $30,464    5%  $25,955    5%  $4,509    17%
Fitness   41,319    6%   40,515    7%   804    2%
Marine   15,791    4%   14,022    4%   1,769    13%
Auto   10,180    2%   14,100    3%   (3,920)   (28)%
Aviation   4,054    1%   5,408    1%   (1,354)   (25)%
Total  $101,808    4%  $100,000    4%  $1,808    2%

 

Advertising expense increased 2% in absolute dollars and was relatively flat as a percent of revenue when compared to the year-ago period. Increased cooperative advertising in the outdoor, fitness, and marine segments and increased media advertising in the outdoor segment was partially offset by decreased cooperative advertising in the auto and aviation segments.

 

Selling, General and Administrative Expense

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Selling, General & Admin.   % of   Selling, General & Admin.   % of             
   Expenses   Revenue   Expenses   Revenue   $ Change   % Change 
Outdoor  $91,390    15%  $85,887    15%  $5,503    6%
Fitness   114,657    17%   95,462    16%   19,195    20%
Marine   69,524    18%   75,841    22%   (6,317)   (8)%
Auto   56,486    13%   68,465    14%   (11,979)   (17)%
Aviation   48,232    9%   26,579    6%   21,653    81%
Total  $380,289    14%  $352,234    15%  $28,055    8%

 

Selling, general and administrative expense increased 8% in absolute dollars and was relatively flat as a percent of revenue when compared to the year-ago period. The absolute dollar increase was primarily attributable to personnel costs, legal related costs, and expenses from recent acquisitions. The fitness segment increase as a percent of revenue was primarily due to expenses from newly acquired Tacx.

 

As noted above and in Note 4 to the Condensed Consolidated Financial Statements, the Company refined its methodology to allocate certain selling, general and administrative expenses in the beginning of the 2019 fiscal year. The prior year amounts are presented here as originally reported. For comparative purposes, we estimate selling, general and administrative expenses for the first three quarters of 2018 would have been approximately $13 million more for the aviation segment, approximately $10 million less for the marine segment, approximately $3 million less for the outdoor segment, and not significantly different for the fitness and auto segments. Selling, general and administrative expense as a percent of revenue also decreased in marine due to greater leverage of operating costs.

 

26

 

 

Considering the refined allocation methodology noted above, we estimate selling, general and administrative expenses for the 52-weeks ended December 29, 2018 would have been approximately $18 million more for the aviation segment, approximately $11 million less for the marine segment, approximately $7 million less for the outdoor segment, and not significantly different for the fitness and auto segments.

 

Research and Development Expense

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Research &   % of   Research &   % of             
   Development   Revenue   Development   Revenue   $ Change   % Change 
Outdoor  $63,648    10%  $52,276    9%  $11,372    22%
Fitness   78,460    12%   67,197    12%   11,263    17%
Marine   60,487    15%   59,307    17%   1,180    2%
Auto   77,368    18%   93,711    19%   (16,343)   (17)%
Aviation   163,398    30%   150,158    34%   13,240    9%
Total  $443,361    17%  $422,649    17%  $20,712    5%

 

Research and development expense as a percent of revenue was relatively flat when compared to the year-ago period and increased 5% in absolute dollars. 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 recent acquisitions, partially offset by the capitalization of certain contractually reimbursable preproduction design and development personnel costs within the auto segment. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

Operating Income

 

   39-Weeks Ended
September 28, 2019
   39-Weeks Ended
September 29, 2018
   Year over Year 
   Operating   % of   Operating   % of             
  Income   Revenue   Income   Revenue   $ Change   % Change 
Outdoor  $218,340    35%  $194,711    35%  $23,629    12%
Fitness   118,369    18%   123,299    21%   (4,930)   (4)%
Marine   88,212    22%   54,806    16%   33,406    61%
Auto   53,978    13%   31,113    6%   22,865    73%
Aviation   190,164    35%   151,741    34%   38,423    25%
Total  $669,063    25%  $555,670    23%  $113,393    20%

 

Operating income increased 20% in absolute dollars and increased 220 basis points as a percent of revenue when compared to the year-ago period. The growth in operating income on an absolute dollar basis and as a percent of revenue was the result of revenue growth, improved gross margin, and greater leverage of operating expenses, as discussed above.

 

Other Income (Expense)

 

   39-Weeks Ended   39-Weeks Ended 
   September 28,
2019
   September 29,
2018
 
Interest income  $39,748   $32,310 
Foreign currency losses   (12,568)   (3,405)
Other   3,567    6,800 
Total  $30,747   $35,705 

 

The average returns on cash and investments, including interest and capital gains/losses, during the 39-weeks ended September 28, 2019 and the 39-weeks ended September 29, 2018 were 2.0% and 1.8%, respectively. Interest income increased primarily due to slightly higher yields on fixed-income securities.

 

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The $12.6 million currency loss recognized in the first three quarters of 2019 was primarily due to the strengthening of the U.S. Dollar against most other currencies, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar within the 39-weeks ended September 28, 2019. During this period, the U.S. Dollar strengthened 1.5% against the Taiwan Dollar, resulting in a gain of $8.6 million. This was more than offset by the U.S. Dollar strengthening 4.4% against the Euro and 3.3% against the British Pound Sterling, resulting in losses of $13.9 million and $0.9 million, respectively, and additional net currency losses of $6.4 million related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

The $3.4 million currency loss recognized in the first three quarters of 2018 was primarily due to the strengthening of the U.S. Dollar against most other currencies, partially offset by the U.S. Dollar strengthening against the Taiwan Dollar within the 39-weeks ended September 29, 2018. During this period, the U.S. Dollar strengthened 2.7% against the Taiwan Dollar, resulting in a gain of $13.6 million. This was more than offset by the U.S. Dollar strengthening 3.2% against the Euro and 3.6% against the British Pound Sterling, resulting in losses of $7.7 million and $0.6 million, respectively, and additional net currency losses of $8.7 million related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

Income Tax Provision

 

The Company recorded income tax expense of $108.1 million in the first three quarters of 2019, compared to income tax expense of $87.4 million in the first three quarters of 2018. The effective tax rate was 15.4% in the first three quarters of 2019, compared to 14.8% in the first three quarters of 2018.

 

As discussed in Note 13 to the Condensed Consolidated Financial Statements, Switzerland corporate tax reform was approved by public referendum in May 2019 and enacted in October 2019. Accordingly, the Company expects to record an income tax benefit of approximately $20 to $220 million in the fourth quarter of 2019 due to an increase in certain Switzerland deferred tax assets resulting from enactment of Switzerland Federal and Schaffhausen cantonal tax reform. The Company is evaluating transitional measures in Switzerland tax law that may affect the overall increase in deferred tax assets as well as the impact of tax reform to its ongoing effective tax rate, the materiality of which is not yet known.

 

Net Income

 

As a result of the above, net income for the 39-week period ended September 28, 2019 was $591.7 million compared to $503.9 million for the 39-week period ended September 29, 2018, an increase of $87.8 million.

 

Liquidity and Capital Resources

 

As of September 28, 2019, we had approximately $2.5 billion of cash and cash equivalents and marketable securities. We primarily use cash flow from operations, and expect that future cash requirements may be used, to fund our capital expenditures, support our working capital requirements, pay dividends, and fund strategic acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.

 

It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Company’s Board of Directors. 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 three quarters of 2019 and 2018 were approximately 2.0% and 1.8%, 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

 

   39-Weeks Ended 
   September 28,   September 29, 
(In thousands)  2019   2018 
Net cash provided by operating activities  $464,170   $701,782 

 

The $237.6 million decrease in cash provided by operating activities during the first three quarters of 2019 compared to the first three quarters of 2018 was primarily due to the increase in cash used in working capital of $310.6 million (which included a decrease of $98.0 million in net receipts of accounts receivable, a net increase of $126.7 million in cash paid for inventory associated primarily with the Company’s effort to increase days of supply to support our increasingly diversified product lines, and a net increase of $85.9 million in cash used in other activities primarily driven by payments associated with an amendment to a license agreement) and income taxes payable of $34.5 million. These decreases were partially offset by the year over year increase in net income and other non-cash adjustments of $107.5 million.

 

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Investing Activities

 

   39-Weeks Ended 
   September 28,   September 29, 
(In thousands)  2019   2018 
Net cash used in investing activities  $(367,808)  $(238,815)

 

The $129.0 million increase in cash used in investing activities during the first three quarters of 2019 compared to the first three quarters of 2018 was primarily due to increased cash payments for acquisitions of $246.1 million, partially offset by decreased net purchases of marketable securities of $85.6 million and cash payments for net purchases of property and equipment of $30.4 million.

 

Financing Activities

 

   39-Weeks Ended 
   September 28,   September 29, 
(In thousands)  2019   2018 
Net cash used in financing activities  $(308,895)  $(288,534)

 

The $20.4 million increase in cash used in financing activities during the first three quarters of 2019 compared to the first three quarters of 2018 was primarily due to an increase in dividend payments of $12.8 million and $7.6 million increase in treasury stock net purchases related to equity awards.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

General

 

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

 

For a description of the significant accounting policies and methods used in the preparation of the Company’s Condensed Consolidated Financial Statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018. There were no material changes to the Company’s critical accounting policies and estimates in the 13-week and 39-week periods ended September 28, 2019, other than those discussed in Note 1, “Accounting Policies”.

 

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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 29, 2018. There have been no material changes during the 13-week and 39-week periods ended September 28, 2019 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.

 

Item 4. Controls and Procedures

 

(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 September 28, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of September 28, 2019 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission (“SEC”) 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 September 28, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II - Other Information

 

Item 1. Legal Proceedings

 

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions, and complaints, including matters involving patent infringement, other intellectual property, product liability, customer claims and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters, or if not, what the impact might be. However, the Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s results of operations, financial position or cash flows. For additional information, see Note 6 – Commitments and Contingencies in the above Condensed Consolidated Financial Statements and Part I, “Item 3. Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 29, 2018.

 

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 29, 2018. There have been no material changes during the 13-week and 39-week periods ended September 28, 2019 in the risks described in our Annual Report on Form 10-K. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

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

 

Not applicable

 

Item 3. Defaults Upon Senior Securities

 

None

 

Item 4. Mine Safety Disclosures

 

Not applicable

 

Item 5. Other Information

 

Not applicable

 

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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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
     
Exhibit 101.SCH   Inline XBRL Taxonomy Extension Schema
     
Exhibit 101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase
     
Exhibit 101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase
     
Exhibit 101.LAB   Inline XBRL Taxonomy Extension Label Linkbase
     
Exhibit 101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase
     
Exhibit 104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

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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: October 30, 2019

 

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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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
     
Exhibit 101.SCH   Inline XBRL Taxonomy Extension Schema
     
Exhibit 101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase
     
Exhibit 101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase
     
Exhibit 101.LAB   Inline XBRL Taxonomy Extension Label Linkbase
     
Exhibit 101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase
     
Exhibit 104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

  

 

34