United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

☒

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

 

For the quarterly period ended March 30, 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

(State or other jurisdiction

of incorporation or organization)

98-0229227

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

Mühlentalstrasse 2

8200 Schaffhausen

Switzerland  

(Address of principal executive offices)

N/A

(Zip Code)

 

 

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

 

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

YES ☑ 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 ☑ 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 ☑ Accelerated Filer ☐ Non-accelerated Filer ☐ (Do not check if a smaller reporting company) Smaller reporting company ☐ Emerging growth company ☐

 

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

 

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

YES ☐ NO ☑

 

Number of shares outstanding of the registrant’s common shares as of April 29, 2019

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

 

1 

 

 

Garmin Ltd.

Form 10-Q

Quarter Ended March 30, 2019

 

Table of Contents

 

Part I - Financial Information Page
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets at March 30, 2019 and December 29, 2018 (Unaudited) 3
     
  Condensed Consolidated Statements of Income for the 13-Weeks  ended March 30, 2019 and March 31, 2018 (Unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Income for  the 13-Weeks ended March 30, 2019 and March 31, 2018 (Unaudited) 5
     
  Condensed Consolidated Statements of Stockholders’ Equity for  the 13-Weeks ended March 30, 2019 and March 31, 2018 (Unaudited) 6
     
  Condensed Consolidated Statements of Cash Flows for the  13-Weeks ended March 30, 2019 and March 31, 2018 (Unaudited) 7
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 25
     
Item 4. Controls and Procedures 26
     
Part II - Other Information  
     
Item 1. Legal Proceedings 27
     
Item 1A. Risk Factors 27
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
     
Item 3. Defaults Upon Senior Securities 27
     
Item 4. Mine Safety Disclosures 27
     
Item 5. Other Information 27
     
Item 6. Exhibits 27
     
Signature Page 29
   
Index to Exhibits 30

 

2 

 

 

Part I - Financial Information

Item I - Condensed Consolidated Financial Statements

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except per share information)

       
  March 30,  December 29, 
  2019  2018 
Assets        
Current assets:        
Cash and cash equivalents $1,115,951  $1,201,732 
 Marketable securities  197,385   182,989 
Accounts receivable, net  453,069   569,833 
Inventories  598,387   561,840 
Deferred costs  27,567   28,462 
Prepaid expenses and other current assets  119,778   120,512 
Total current assets  2,512,137   2,665,368 
         
Property and equipment, net  672,299   663,527 
Operating lease right-of-use assets  54,978   — 
         
Restricted cash  148   73 
Marketable securities  1,337,771   1,330,123 
Deferred income taxes  170,935   176,959 
Noncurrent deferred costs  28,428   29,473 
Intangible assets, net  411,162   417,080 
Other assets   92,287   100,255 
Total assets $5,280,145  $5,382,858 
         
Liabilities and Stockholders’ Equity        
Current liabilities:        
Accounts payable $170,474  $204,985 
Salaries and benefits payable  95,881   113,087 
Accrued warranty costs  35,042   38,276 
Accrued sales program costs  54,597   90,388 
Deferred revenue  93,653   96,372 
Accrued royalty costs  16,768   24,646 
Accrued advertising expense  18,263   31,657 
Other accrued expenses  81,919   69,777 
Income taxes payable  55,929   51,642 
Dividend payable  —   200,483 
Total current liabilities  622,526   921,313 
         
Deferred income taxes  98,959   92,944 
Noncurrent income taxes  127,339   127,211 
Noncurrent deferred revenue  72,531   76,566 
Noncurrent operating lease liabilities  43,277   — 
Other liabilities  227   1,850 
         
Stockholders’ equity:        
Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 189,847 shares outstanding at March 30, 2019; and 189,461 shares outstanding at December 29, 2018;  17,979   17,979 
Additional paid-in capital  1,810,196   1,823,638 
Treasury stock  (381,815)  (397,692)
Retained earnings  2,850,588   2,710,619 
Accumulated other comprehensive income  18,338   8,430 
Total stockholders’ equity  4,315,286   4,162,974 
Total liabilities and stockholders’ equity $5,280,145  $5,382,858 

 

See accompanying notes.

 

3 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Net sales $766,050  $710,872 
         
Cost of goods sold  314,352   284,337 
         
Gross profit  451,698   426,535 
         
Advertising expense  27,615   25,311 
Selling, general and administrative expense  126,781   117,065 
Research and development expense  145,919   141,957 
Total operating expense  300,315   284,333 
         
Operating income  151,383   142,202 
         
Other income:        
Interest income  13,704   10,227 
Foreign currency gains  314   816 
Other income  864   735 
Total other income  14,882   11,778 
         
Income before income taxes  166,265   153,980 
         
Income tax provision  26,092   24,606 
         
Net income $140,173  $129,374 
         
Net income per share:        
Basic $0.74  $0.69 
Diluted $0.74  $0.68 
         
Weighted average common shares outstanding:        
Basic  189,601   188,322 
Diluted  190,599   189,292 

 

See accompanying notes.

  

4 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Net income $140,173  $129,374 
Foreign currency translation adjustment  (9,235)  23,500 
Change in fair value of available-for-sale marketable securities, net of deferred taxes  19,143   (15,034)
Comprehensive income $150,081  $137,840 

 

See accompanying notes.

  

5 

 

 

Garmin Ltd. And Subsidiaries 

Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) 

(In thousands)

 

              Accumulated    
     Additional        Other    
  Common  Paid-In  Treasury  Retained  Comprehensive    
  Stock  Capital  Stock  Earnings  Income (Loss)  Total 
Balance at December 30, 2017 $17,979  $1,828,386  $(468,818) $2,418,444  $56,428  $3,852,419 
Net income  —   —   —   129,374   —   129,374 
Translation adjustment  —   —   —   —   23,500   23,500 
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,416  —   —   —   —   (15,034)  (15,034)
Comprehensive income                      137,840 
Dividends declared  —   —   —   (170)  —   (170)
Issuance of treasury stock related to equity awards  —   (23,294)  25,220   —   —   1,926 
Stock compensation  —   13,440   —   —   —   13,440 
Purchase of treasury stock related to equity awards  —   —   (6,562)  —   —   (6,562)
Reclassification under ASU 2016-06  —   —   —   (1,700)  —   (1,700)
Reclassification under ASU 2018-02  —   —   —   452   (452)  — 
Balance at March 31, 2018 $17,979  $1,818,532  $(450,160) $2,546,400  $64,442  $3,997,193 

 

              Accumulated    
     Additional        Other    
  Common  Paid-In  Treasury  Retained  Comprehensive    
  Stock  Capital  Stock  Earnings  Income (Loss)  Total 
Balance at December 29, 2018 $17,979  $1,823,638  $(397,692) $2,710,619  $8,430   4,162,974 
Net income  —   —   —   140,173   —   140,173 
Translation adjustment  —   —   —   —   (9,235)  (9,235)
Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $2,905  —   —   —   —   19,143   19,143 
Comprehensive income                      150,081 
Dividends declared  —   —   —   (204)  —   (204)
Issuance of treasury stock related to equity awards  —   (28,571)  28,571   —   —   — 
Stock compensation  —   15,129   —   —   —   15,129 
Purchase of treasury stock related to equity  awards  —   —   (12,694)  —   —   (12,694)
Balance at March 30, 2019 $17,979  $1,810,196  $(381,815) $2,850,588  $18,338  $4,315,286 

 

See accompanying notes. 

 

6 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Operating activities:        
Net income $140,173  $129,374 
Adjustments to reconcile net income to net cash provided by operating activities:        
Depreciation  16,832   16,014 
Amortization  7,179   7,132 
Loss (gain) on sale or disposal of property and equipment  227   (15)
Provision for doubtful accounts  408   57 
Provision for obsolete and slow moving inventories  7,579   3,959 
Unrealized foreign currency loss (gain)  3,124   (517)
Deferred income taxes  9,105   416 
Stock compensation expense  15,129   13,440 
Realized losses on marketable securities  60   196 
Changes in operating assets and liabilities, net of acquisitions:        
Accounts receivable  112,488   187,693 
Inventories  (46,646)  (26,455)
Other current and non-current assets  2,930   9,037 
Accounts payable  (32,786)  (36,708)
Other current and non-current liabilities  (76,030)  (99,935)
Deferred revenue  (6,744)  (8,368)
Deferred costs  1,938   1,807 
Income taxes payable  9,616   17,063 
Net cash provided by operating activities  164,582   214,190 
         
Investing activities:        
Purchases of property and equipment  (30,094)  (26,336)
Proceeds from sale of property and equipment  47   121 
Purchase of intangible assets  (413)  (1,622)
Purchase of marketable securities  (83,068)  (140,623)
Redemption of marketable securities  80,907   65,253 
Acquisitions, net of cash acquired  —   (9,417)
Net cash used in investing activities  (32,621)  (112,624)
         
Financing activities:        
Dividends  (200,687)  (96,146)
Proceeds from issuance of treasury stock related to equity awards  —   1,926 
Purchase of treasury stock related to equity awards  (12,694)  (6,562)
Net cash used in financing activities $(213,381) $(100,782)
         
Effect of exchange rate changes on cash, cash equivalents, and restricted cash  (4,286)  6,717 
         
Net (decrease) increase in cash, cash equivalents, and restricted cash  (85,706)  7,501 
Cash, cash equivalents, and restricted cash at beginning of period  1,201,805   891,759 
Cash, cash equivalents, and restricted cash at end of period $1,116,099  $899,260 

 

See accompanying notes.

 

7 

 

 

Garmin Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

March 30, 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 period ended March 30, 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 March 30, 2019 and March 31, 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 12 – Leases for additional information regarding leases.

 

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 13-week period ended March 30, 2019.

 

8 

 

 

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 $5 million as of March 30, 2019, and there were no such capitalized costs as of December 29, 2018.

 

2.Inventories

 

The components of inventories consist of the following:

 

  March 30,  December 29, 
  2019  2018 
       
Raw materials $213,380  $205,696 
Work-in-process  103,204   96,564 
Finished goods  281,803   259,580 
Inventories $598,387  $561,840 

 

3.Earnings Per Share

 

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

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Numerator:      
       
Numerator for basic and diluted net income per share - net income $140,173  $129,374 
         
Denominator:        
Denominator for basic net income per share – weighted-average common shares  189,601   188,322 
         
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units  998   970 
         
Denominator for diluted net income per share – adjusted weighted-average common shares  190,599   189,292 
         
Basic net income per share $0.74  $0.69 
         
Diluted net income per share $0.74  $0.68 

 

9 

 

 

There were no anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended March 30, 2019 and March 31, 2018.

 

There were 386 and 332 net shares issued as a result of exercises and releases of equity awards for the 13-week periods ended March 30, 2019 and March 31, 2018, respectively.

 

4.Segment Information

 

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

 

In the first quarter of fiscal 2019, the methodology used to allocate certain selling, general, and administrative expenses to the segments was refined, endeavoring to provide the Company’s CODM with a more meaningful representation of segment profit or loss in light of the evolution of its segments. The Company’s composition of operating segments and reportable segments did not change. Prior year amounts are presented here as they were originally reported, as it is not practicable to accurately restate prior period activity in accordance with the refined allocation methodology. For comparative purposes, we estimate operating income for the 13-weeks ended March 31, 2018 would have been approximately $4 million less for the aviation segment, approximately $4 million more for the marine segment, and not significantly different for the outdoor, fitness, and auto segments.

 

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

 

   Reportable Segments 
                         
   Outdoor   Fitness   Marine   Auto   Aviation   Total 
                         
13-Weeks Ended March 30, 2019                        
                         
Net sales $154,051  $180,256  $133,968  $126,999  $170,776  $766,050 
Gross profit  97,488   90,835   78,055   57,337   127,983   451,698 
Operating income  41,953   18,126   25,473   8,213   57,618   151,383 
                         
13-Weeks Ended March 31, 2018                        
                         
Net sales $144,258  $166,035  $113,554  $141,312  $145,713  $710,872 
Gross profit  93,285   96,601   66,683   61,012   108,954   426,535 
Operating income  43,822   33,374   13,131   3,468   48,407   142,202 

 

10 

 

 

Net sales to external customers by geographic region were as follows for the 13-week periods ended March 30, 2019 and March 31, 2018. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Americas $379,456  $345,975 
EMEA  260,021   245,912 
APAC  126,573   118,985 
Net sales to external customers $766,050  $710,872 

 

Net property and equipment by geographic region as of March 30, 2019 and March 31, 2018 are presented below.

 

  Americas  APAC  EMEA  Total 
March 30, 2019                
Property and equipment, net $413,632  $212,933  $45,734  $672,299 
                 
March 31, 2018                
Property and equipment, net $388,531  $176,245  $40,037  $604,813 

 

5.Warranty Reserves

 

The Company’s products sold are generally covered by a standard warranty for periods ranging from one to three years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and 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.

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
       
Balance - beginning of period $38,276  $36,827 
Accrual for products sold during the period(1)  10,849   10,012 
Expenditures  (14,083)  (11,417)
Balance - end of period $35,042  $35,422 

 

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

 

6.Commitments and Contingencies

 

Commitments

 

The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of March 30, 2019 was approximately $435,100. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

 

11 

 

 

Contingencies

 

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

 

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

 

Management of the Company currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal quarter ended March 30, 2019. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.

 

The Company settled or resolved certain matters during the 13-week period ended March 30, 2019 that did not individually or in the aggregate have a material impact on the Company’s business or its consolidated financial position, results of operations or cash flows.

 

7. Income Taxes

 

The Company recorded income tax expense of $26,092 in the 13-week period ended March 30, 2019, compared to income tax expense of $24,606 in the 13-week period ended March 31, 2018. The effective tax rate was 15.7% in the first quarter of 2019, compared to 16.0% in the first quarter of 2018.

 

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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

 

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:

 

  Fair Value Measurements as
of March 30, 2019		 
  Total  Level 1  Level 2  Level 3 
U.S. Treasury securities $22,229  $—  $22,229  $— 
Agency securities  63,714   —   63,714   — 
Mortgage-backed securities  131,973   —   131,973   — 
Corporate securities  1,019,083   —   1,019,083   — 
Municipal securities  171,551   —   171,551   — 
Other  126,606   —   126,606   — 
Total $1,535,156  $—  $1,535,156  $— 

 

  Fair Value Measurements as
of 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  $— 

 

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

 

  Available-For-Sale Securities as
of March 30, 2019		 
    
  Amortized Cost  Gross Unrealized Gains  Gross Unrealized Losses  Fair Value 
U.S. Treasury securities $22,448  $—  $(219) $22,229 
Agency securities  64,178   72   (535)  63,715 
Mortgage-backed securities  136,763   2   (4,793)  131,972 
Corporate securities  1,031,431   2,013   (14,361)  1,019,083 
Municipal securities  172,399   287   (1,135)  171,551 
Other  128,353   0   (1,747)  126,606 
Total $1,555,572  $2,374  $(22,790) $1,535,156 

 

  Available-For-Sale Securities as
of 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 13-week period ended March 30, 2019, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and fair value of the securities at an unrealized loss position as of March 30, 2019 were $1,223,105 and $1,200,315, respectively. Approximately 73% of securities in our portfolio were at an unrealized loss position as of March 30, 2019. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no material deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no material impairment has been recorded in the accompanying condensed consolidated statement of income.

 

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

 

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The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of March 30, 2019 and December 29, 2018.

 

  As of March 30, 2019 
  Less than 12 Consecutive Months  12 Consecutive Months or Longer 
  Gross Unrealized Losses  Fair Value  Gross Unrealized Losses  Fair Value 
U.S. Treasury securities $(1) $3,988  $(218) $18,241 
Agency securities  (1)  2,257   (534)  38,985 
Mortgage-backed securities  (1)  301   (4,792)  131,521 
Corporate securities  (172)  65,937   (14,189)  700,387 
Municipal securities  (19)  11,415   (1,116)  120,394 
Other  (1)  1,177   (1,746)  105,712 
Total $(195) $85,075  $(22,595) $1,115,240 

 

 

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

 

The amortized cost and fair value of marketable securities at March 30, 2019, by maturity, are shown below.

 

  Amortized Cost  Fair Value 
       
Due in one year or less $198,020  $197,385 
Due after one year through five years  1,262,371   1,247,012 
Due after five years through ten years  95,181   90,759 
  $ 1,555,572   $1,535,156

9. Accumulated Other Comprehensive Income

 

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week period ended March 30, 2019:

 

  13-Weeks Ended March 30, 2019 
  Foreign Currency Translation Adjustment  Net unrealized gains (losses) on available-for-sale securities  Total 
Beginning Balance $47,327  $(38,897) $8,430 
Other comprehensive income before reclassification, net of income tax benefit of $2,905  (9,234)  19,100   9,866 
Amounts reclassified from accumulated other comprehensive income  —   42   42 
Net current-period other comprehensive income  (9,234)  19,142   9,908 
Ending Balance $38,093  $(19,755) $18,338 

 

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The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week period ended March 30, 2019:

 

13-Weeks Ended March 30, 2019
Details About Accumulated Other
Comprehensive Income
Components		  Amount Reclassified
from Accumulated
Other Comprehensive
Income		  Affected Line Item in the
Statement Where Net Income is
Presented
       
Unrealized gains (losses) on available-for-sale securities $(60) Other income (expense)
   18  Income tax benefit (provision)
  $(42) Net of tax

 

10. Revenue

 

In order to further depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors, we disaggregate revenue (or “net sales”) by geographic region, major product category, 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 Revenue by Major Product Category 
  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Auto PND  59%   63% 
Auto OEM  41%   37% 

 

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

 

  13-Weeks Ended 
  March 30,  March 31, 
  2019  2018 
Point in time $724,177  $671,263 
Over time  41,873   39,609 
Net sales $766,050  $710,872 

 

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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 consolidated balance sheets. Such amounts are recognized ratably over the applicable service period or estimated useful life. Changes in deferred revenue and costs during the 13-week period ending March 30, 2019 are presented below:

 

   13-Weeks Ended 
   March 30, 
   2019 
    Deferred Revenue(1)   Deferred Costs(2) 
          
Balance, beginning of period  $172,938  $57,935 
Deferrals in period   35,119   6,923 
Recognition of deferrals in period   (41,873)  (8,863)
Balance, end of period  $166,184  $55,995 

 

(1) Deferred revenue is comprised of both Deferred revenue and Noncurrent deferred revenue per the Condensed Consolidated Balance Sheets  

(2) Deferred costs are comprised of both Deferred costs and Noncurrent deferred costs per the Condensed Consolidated Balance Sheets  

 

 

Of the $41,873 of deferred revenue recognized in the 13-weeks ended March 30, 2019, $31,161 was deferred as of the beginning of the period.

 

Approximately two-thirds of the $166,184 of deferred revenue at the end of the period, March 30, 2019, is recognized ratably over a period of three years or less.

 

11. Leases

 

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

 

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

 

The following table represents lease costs recognized in the Company’s Condensed Consolidated Statements of Income for the 13-weeks ended March 30, 2019. Lease costs are included in Selling, general and administrative expense and Research and development expense on the Company’s Condensed Consolidated Statements of Income.

 

  13-Weeks Ended 
  March 30, 
  2019 
Operating lease cost(1) $5,642 

 

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

 

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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 March 30, 2019.

 

  March 30, 
  2019 
    
Operating lease right-of-use assets $54,978 
     
Other accrued expenses $13,095 
Noncurrent operating lease liabilities  43,277 
Total lease liabilities $56,372 
     
Weighted average remaining lease term   5.5 years  
Weighted average discount rate  4.0% 

 

The following table represents the maturity of lease liabilities.

 

Fiscal Year  Lease payments 
2019, excluding the 13-weeks ended March 30, 2019  $12,260 
2020   13,727 
2021   10,360 
2022   7,058 
2023   6,742 
Thereafter   13,725 
Total  $63,872 
Less: imputed interest   (7,500)
Present value of lease liabilities  $56,372 

 

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

 

  13-Weeks Ended 
  March 30, 
  2019 
Cash paid for amounts included in the measurement of operating lease liabilities(2) $4,412 
Right-of-use assets obtained in exchange for new operating lease liabilities $2,859 

 

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

 

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12. Recently Issued Accounting Pronouncements Not Yet Adopted

 

Receivables – Nonrefundable Fees and Other Costs

 

In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Callable debt securities held at a discount continue to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

 

Financial Instruments – Credit Losses

 

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

 

13. Subsequent Events

 

On April 1, 2019, the Company acquired the shares of Tacx Onroerend en Roerend Goed B.V., a privately-held Dutch company, that designs and manufacturers indoor bike trainers, tools and accessories, as well as indoor training software and applications. This acquisition was not material.

 

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

 

Overview

 

The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of the Company’s assumptions prove incorrect or should unanticipated circumstances arise, actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 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.

 

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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 also maintains relationships with many original equipment manufacturers (OEMs). However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.  

 

Results of Operations

 

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

 

  13-Weeks Ended 
  March 30, 2019  March 31, 2018 
       
Net sales  100%   100% 
Cost of goods sold  41%   40% 
Gross profit  59%   60% 
Advertising expense  4%   4% 
Selling, general and administrative expense  17%   16% 
Research and development expense  19%   20% 
Total operating expense  39%   40% 
Operating income  20%   20% 
Other income  2%   2% 
Income before income taxes  22%   22% 
Income tax provision  3%   3% 
Net income  18%   18% 

 

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 ended March 31, 2018 are presented here as they were originally reported.

 

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Comparison of 13-Weeks ended March 30, 2019 and March 31, 2018  

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

 

Net Sales

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018  Year over Year 
   Net Sales  % of Revenue  Net Sales  % of Revenue  $ Change  % Change 
Outdoor  $154,051   20%  $144,258   20%  $9,793   7% 
Fitness   180,256   24%   166,035   23%   14,221   9% 
Marine   133,968   17%   113,554   16%   20,414   18% 
Auto   126,999   17%   141,312   20%   (14,313)  (10%)
Aviation   170,776   22%   145,713   21%   25,063   17% 
Total  $766,050   100%  $710,872   100%  $55,178   8% 

 

Net sales increased 8% for the 13-week period ended March 30, 2019 when compared to the year-ago quarter. The outdoor, fitness, marine, and aviation segments collectively increased by 12%, contributing 83% of total revenue. Fitness was the largest portion of our revenue mix at 24% in the first quarter of 2019 compared to 23% in the first quarter of 2018.  

 

Total unit sales in the first quarter of 2019 increased to 3,182 when compared to total unit sales of 2,956 in the first quarter of 2018.

 

Outdoor, fitness, marine, and aviation segment revenue increased 7%, 9%, 18%, and 17%, respectively, when compared to the year-ago quarter. The outdoor and fitness segment revenue increases were primarily driven by strong sales in wearables. The current quarter marine segment revenue increase was primarily driven by sales growth in chartplotters and sonar products. The aviation segment revenue increase was driven by sales growth across most product lines in both OEM and aftermarket categories. Auto segment revenue decreased 10% from the year-ago quarter, primarily due to the ongoing PND market contraction.

 

Gross Profit

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018  Year over Year 
   Gross Profit  % of Revenue  Gross Profit  % of Revenue  $ Change  % Change 
Outdoor  $97,488   63%  $93,285   65%  $4,203   5% 
Fitness   90,835   50%   96,601   58%   (5,766)  (6%)
Marine   78,055   58%   66,683   59%   11,372   17% 
Auto   57,337   45%   61,012   43%   (3,675)  (6%)
Aviation   127,983   75%   108,954   75%   19,029   17% 
Total  $451,698   59%  $426,535   60%  $25,163   6% 

 

Gross profit dollars in the first quarter of 2019 increased 6% primarily due to growth in net sales while gross margin decreased 100 basis points compared to the year-ago quarter. Gross margin in the outdoor and fitness segments decreased compared to the year-ago quarter. Gross margin increased in the auto segment and was relatively flat in the aviation and marine segments when compared to the year-ago quarter.

 

The auto segment gross margin increase was primarily attributable to product mix. The fitness segment gross margin decrease was primarily attributable to lower average selling prices and product mix. The outdoor segment gross margin decrease was primarily attributable to product mix.

 

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Advertising Expense

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018    
   Advertising     Advertising     Year over Year 
   Expense  % of Revenue  Expense  % of Revenue  $ Change  % Change 
Outdoor  $7,171   5%  $5,800   4%  $1,371   24% 
Fitness   9,989   6%   9,685   6%   304   3% 
Marine   6,331   5%   5,285   5%   1,046   20% 
Auto   2,902   2%   3,230   2%   (328)  (10%)
Aviation   1,222   1%   1,311   1%   (89)  (7%)
Total  $27,615   4%  $25,311   4%  $2,304   9% 

 

Advertising expense increased 9% in absolute dollars and was relatively flat as a percent of revenue compared to the year-ago quarter. The total absolute dollar increase was primarily attributable to increased media advertising in the outdoor segment and increased cooperative advertising in the fitness and marine segments.

 

Selling, General and Administrative Expense

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018    
    Selling, General &       Selling, General &      Year over Year 
    Admin. Expenses   % of Revenue   Admin. Expenses   % of Revenue   $ Change   % Change 
Outdoor  $28,302   18%  $26,056   18%  $2,246   9% 
Fitness   37,573   21%   31,295   19%   6,278   20% 
Marine   25,983   19%   28,453   25%   (2,470)  (9%) 
Auto   19,295   15%   22,059   16%   (2,764)  (13%) 
Aviation   15,628   9%   9,202   6%   6,426   70% 
Total  $126,781   17%  $117,065   16%  $9,716   8% 

 

Selling, general and administrative expense increased 8% in absolute dollars and was relatively flat as a percent of revenue compared to the year-ago quarter. The absolute dollar increase in the first quarter of 2019 was primarily attributable to personnel costs and legal related costs.

 

As noted above and in Note 4 to the Condensed Consolidated Financial Statements, the Company refined its methodology to allocate certain selling, general and administrative expenses 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 quarter of 2018 would have been approximately $4 million more for the aviation segment, approximately $4 million less for the marine segment, and not significantly different for the outdoor, fitness, and auto segments. Selling, general and administrative expenses as a percent of revenue also decreased in marine due to leverage of operating costs and increased in fitness primarily due to legal related costs.

 

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

 

Research and Development Expense

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018    
   Research &     Research &     Year over Year 
   Development  % of Revenue  Development  % of Revenue  $ Change  % Change 
Outdoor  $20,062   13%  $17,607   12%  $2,455   14% 
Fitness   25,147   14%   22,247   13%   2,900   13% 
Marine   20,268   15%   19,814   17%   454   2% 
Auto   26,927   21%   32,255   23%   (5,328)  (17%)
Aviation   53,515   31%   50,034   34%   3,481   7% 
Total  $145,919   19%  $141,957   20%  $3,962   3% 

 

Research and development expense increased 3% in absolute dollars and decreased 90 basis points as a percent of revenue compared to the year-ago quarter. This increase in absolute dollars was primarily due to higher engineering personnel costs related to wearable and aviation product offerings. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

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Operating Income

 

   13-Weeks Ended March 30, 2019  13-Weeks Ended March 31, 2018  Year over Year
   Operating Income  % of Revenue  Operating Income  % of Revenue  $ Change  % Change
Outdoor   $41,953    27%  $43,822    30%  $(1,869)   (4%)
Fitness    18,126    10%   33,374    20%   (15,248)   (46%)
Marine    25,473    19%   13,131    12%   12,342    94%
Auto    8,213    6%   3,468    2%   4,745    137%
Aviation    57,618    34%   48,407    33%   9,211    19%
Total   $151,383    20%  $142,202    20%  $9,181    6%

 

Operating income increased 6% in absolute dollars and was relatively flat as a percent of revenue when compared to the year-ago quarter. In the current quarter, the growth in operating income in absolute dollars was primarily attributable to revenue and gross profit dollar growth, partially offset by increased operating expenses, as discussed above.

 

Other Income (Expense)

 

   13-Weeks Ended  13-Weeks Ended
   March 30, 2019  March 31, 2018
Interest income  $13,704   $10,227 
Foreign currency gains   314    816 
Other   864    735 
Total  $14,882   $11,778 

 

The average return on cash and investments, including interest and capital gains/losses, during the first quarter of 2019 was 2.0% compared to 1.7% during the same quarter of 2018, primarily due to slightly higher yields on fixed-income securities.

 

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

 

The $0.3 million currency gain recognized in the first quarter of 2019 was primarily due to the strengthening of the U.S. Dollar against Taiwan Dollar and weakening against the British Pound Sterling, offset by the U.S. Dollar strengthening against the Euro, within the 13-weeks ended March 30, 2019. During this period, the U.S. Dollar strengthened 0.9% against the Taiwan Dollar and weakened 2.6% against the British Pound Sterling, resulting in gains of $5.8 million and $1.2 million, respectively, while the U.S. Dollar strengthened 1.9% against the Euro, resulting in a loss of $7.8 million. The remaining net currency gain of $1.1 million was related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

The $0.8 million currency gain recognized in the first quarter of 2018 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar, Euro, and British Pound Sterling within the 13-weeks ended March 31, 2018. During this period, the U.S. Dollar weakened 2.7% against the Euro and 3.7% against the British Pound Sterling, resulting in gains of $8.8 million and $2.0 million, respectively, while the U.S. Dollar weakened 2.0% against the Taiwan Dollar, resulting in a loss of $12.7 million. The remaining net currency gain of $2.7 million was related to the timing of transactions and impacts of other currencies, each of which was individually immaterial.

 

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Income Tax Provision

 

The Company recorded income tax expense of $26.1 million in the 13-week period ended March 30, 2019, compared to income tax expense of $24.6 million in the 13-week period ended March 31, 2018. The effective tax rate was 15.7% in the first quarter of 2019, compared to 16.0% in the first quarter of 2018.

 

Net Income

 

As a result of the above, net income for the 13-weeks ended March 30, 2019 was $140.2 million compared to $129.4 million for the 13-week period ended March 31, 2018, an increase of $10.8 million.

 

Liquidity and Capital Resources

 

As of March 30, 2019, we had approximately $2.7 billion of cash and cash equivalents and marketable securities. We primarily use cash flow from operations, and expect that future cash requirements may be used, to fund our capital expenditures, support our working capital requirements, pay dividends, and fund strategic acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.

 

It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Board of Directors of each applicable Garmin entity holding the cash. The investment policy’s primary purpose is to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during the first quarter of 2019 and 2018 were approximately 2.0% and 1.7%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. See Note 8 for additional information regarding marketable securities.

 

Operating Activities

 

   13-Weeks Ended
   March 30,  March 31,
(In thousands)  2019  2018
Net cash provided by operating activities  $164,582   $214,190 

 

The $49.6 million decrease in cash provided by operating activities in the first quarter of 2019 compared to the first quarter of 2018 was primarily due to the decrease in cash provided by working capital of $67.9 million (which included a decrease of $74.9 million in net receipts of accounts receivable, an increase of $16.6 million in cash paid for inventory, partially offset by $23.6 million net cash provided by changes in accounts payable and other activities) and income taxes payable of $7.4 million. These decreases were partially offset by the year over year increase in net income of $10.8 million and other non-cash adjustments to net income of $14.9 million.

 

Investing Activities

 

   13-Weeks Ended
   March 30,  March 31,
(In thousands)  2019  2018
Net cash used in investing activities  $(32,621)  $(112,624)

 

The $80.0 million decrease in cash used in investing activities during the first quarter of 2019 compared to the first quarter of 2018 was primarily due to decreased net purchases of marketable securities of $73.2 million and cash payments for acquisitions of $9.4 million, partially offset by $2.6 million net cash used in other activities.

 

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Financing Activities

 

   13-Weeks Ended
   March 30,  March 31,
(In thousands)  2019  2018
Net cash used in financing activities  $(213,381)  $(100,782)

 

The $112.6 million increase in cash used in financing activities during the first quarter of 2019 compared to the first quarter of 2018 was primarily due to an increase in dividend payments of $104.5 million associated with the timing of dividend payments that resulted in two dividend payments in the first quarter of 2019 compared to one dividend payment in the first quarter of 2018.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

General

 

Garmin’s discussion and analysis of its financial condition and results of operations are based upon Garmin’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The presentation of these financial statements requires Garmin to make estimates and judgments that affect the reported amounts of assets, liabilities, 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 period ended March 30, 2019, other than those discussed in Note 1, “Accounting Policies”.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 29, 2018. There have been no material changes during the 13-week period ended March 30, 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.

 

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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 March 30, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 30, 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 March 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

26 

 

 

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 period ended March 30, 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

 

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

 

 

27 

 

 

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

XBRL Taxonomy Extension Presentation Linkbase

 

Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

28 

 

 

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: May 1, 2019    

 

 

29 

 

 

INDEX TO EXHIBITS

 

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

 

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

XBRL Taxonomy Extension Presentation Linkbase

 

Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

30