United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM
For
the quarterly period ended
or
For the transition period from to
Commission
file number
(Exact name of Company as specified in its charter)
| (State or other jurisdiction | (I.R.S. Employer | |
| of incorporation or organization) | identification no.) | |
| (Address of principal executive offices) | (Zip Code) |
Company’s
telephone number, including area code: +
Securities registered pursuant to Section 12(b) of the Act:
| (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.
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).
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.
| 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 ☐
Number of shares outstanding of the registrant’s common shares as of October 28, 2019
Registered Shares, CHF 0.10 par value: (including treasury shares)
Garmin Ltd.
Form 10-Q
Quarter Ended September 28, 2019
Table of Contents
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 | $ | $ | ||||||
| Marketable securities | ||||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Deferred costs | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use assets | ||||||||
| Restricted cash | ||||||||
| Marketable securities | ||||||||
| Deferred income taxes | ||||||||
| Noncurrent deferred costs | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Salaries and benefits payable | ||||||||
| Accrued warranty costs | ||||||||
| Accrued sales program costs | ||||||||
| Deferred revenue | ||||||||
| Accrued royalty costs | ||||||||
| Accrued advertising expense | ||||||||
| Other accrued expenses | ||||||||
| Income taxes payable | ||||||||
| Dividend payable | ||||||||
| Total current liabilities | ||||||||
| Deferred income taxes | ||||||||
| Noncurrent income taxes | ||||||||
| Noncurrent deferred revenue | ||||||||
| Noncurrent operating lease liabilities | ||||||||
| Other liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Shares, CHF par value, shares authorized and issued; shares outstanding at September 28, 2019; and shares outstanding at December 29, 2018; | ||||||||
| Additional paid-in capital | ||||||||
| Treasury stock | ( | ) | ( | ) | ||||
| Retained earnings | ||||||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
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 | $ | $ | $ | $ | ||||||||||||
| Cost of goods sold | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Advertising expense | ||||||||||||||||
| Selling, general and administrative expense | ||||||||||||||||
| Research and development expense | ||||||||||||||||
| Total operating expense | ||||||||||||||||
| Operating income | ||||||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | ||||||||||||||||
| Foreign currency losses | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income | ||||||||||||||||
| Total other income (expense) | ( | ) | ||||||||||||||
| Income before income taxes | ||||||||||||||||
| Income tax provision | ||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||
| Net income per share: | ||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average common shares outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Diluted | ||||||||||||||||
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 | $ | $ | $ | $ | ||||||||||||
| Foreign currency translation adjustment | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Change in fair value of available-for-sale marketable securities, net of deferred taxes | ( | ) | ( | ) | ||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||
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)
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at June 30, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $ | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||
| Dividends declared | ||||||||||||||||||||||||
| Issuance of treasury stock related to equity awards | ( | ) | ||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Purchase of treasury stock related to equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 29, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at June 29, 2019 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $ | ||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||
| Dividends declared | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of treasury stock related to equity awards | ( | ) | ||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Purchase of treasury stock related to equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 28, 2019 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
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 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $ | ( | ) | ( | ) | ||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||
| Dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of treasury stock related to equity awards | ( | ) | ||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Purchase of treasury stock related to equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Reclassification under ASU 2016-06 | ( | ) | ( | ) | ||||||||||||||||||||
| Reclassification under ASU 2018-02 | ( | ) | ||||||||||||||||||||||
| Balance at September 29, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||
| Common | Paid-In | Treasury | Retained | Comprehensive | ||||||||||||||||||||
| Stock | Capital | Stock | Earnings | Income (Loss) | Total | |||||||||||||||||||
| Balance at December 29, 2018 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
| Net income | ||||||||||||||||||||||||
| Translation adjustment | ( | ) | ( | ) | ||||||||||||||||||||
| Adjustment related to unrealized gains (losses) on available-for-sale securities net of income tax effects of $ | ||||||||||||||||||||||||
| Comprehensive income | ||||||||||||||||||||||||
| Dividends declared ($ per share) | ( | ) | ( | ) | ||||||||||||||||||||
| Issuance of treasury stock related to equity awards | ( | ) | ||||||||||||||||||||||
| Stock compensation | ||||||||||||||||||||||||
| Purchase of treasury stock related to equity awards | ( | ) | ( | ) | ||||||||||||||||||||
| Balance at September 28, 2019 | $ | $ | $ | ( | ) | $ | $ | $ | ||||||||||||||||
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 | $ | $ | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Depreciation | ||||||||
| Amortization | ||||||||
| Gain on sale or disposal of property and equipment | ( | ) | ( | ) | ||||
| Provision for doubtful accounts | ||||||||
| Provision for obsolete and slow moving inventories | ||||||||
| Unrealized foreign currency loss | ||||||||
| Deferred income taxes | ||||||||
| Stock compensation expense | ||||||||
| Realized (gains) losses on marketable securities | ( | ) | ||||||
| Changes in operating assets and liabilities, net of acquisitions: | ||||||||
| Accounts receivable | ||||||||
| Inventories | ( | ) | ( | ) | ||||
| Other current and non-current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Other current and non-current liabilities | ( | ) | ( | ) | ||||
| Deferred revenue | ( | ) | ( | ) | ||||
| Deferred costs | ||||||||
| Income taxes payable | ( | ) | ||||||
| Net cash provided by operating activities | ||||||||
| Investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Proceeds from sale of property and equipment | ||||||||
| Purchase of intangible assets | ( | ) | ( | ) | ||||
| Purchase of marketable securities | ( | ) | ( | ) | ||||
| Redemption of marketable securities | ||||||||
| Acquisitions, net of cash acquired | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Financing activities: | ||||||||
| Dividends | ( | ) | ( | ) | ||||
| Proceeds from issuance of treasury stock related to equity awards | ||||||||
| Purchase of treasury stock related to equity awards | ( | ) | ( | ) | ||||
| Net cash used in financing activities | ( | ) | ( | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents, and restricted cash | ( | ) | ( | ) | ||||
| Net (decrease) increase in cash, cash equivalents, and restricted cash | ( | ) | ||||||
| Cash, cash equivalents, and restricted cash at beginning of period | ||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | $ | ||||||
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 $
| 2. | Inventories |
The components of inventories consist of the following:
| September 28, | December 29, | |||||||
| 2019 | 2018 | |||||||
| Raw materials | $ | $ | ||||||
| Work-in-process | ||||||||
| Finished goods | ||||||||
| Inventories | $ | $ | ||||||
3. | Earnings Per Share |
The following table sets forth the 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 | $ | $ | ||||||
| Denominator: | ||||||||
| Denominator for basic net income per share – weighted-average common shares | ||||||||
| Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units | ||||||||
| Denominator for diluted net income per share – adjusted weighted-average common shares | ||||||||
| Basic net income per share | $ | $ | ||||||
| Diluted net income per share | $ | $ | ||||||
8
| 39-Weeks Ended | ||||||||
| September 28, | September 29, | |||||||
| 2019 | 2018 | |||||||
| Numerator: | ||||||||
| Numerator for basic and diluted net income per share - net income | $ | $ | ||||||
| Denominator: | ||||||||
| Denominator for basic net income per share – weighted-average common shares | ||||||||
| Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units | ||||||||
| Denominator for diluted net income per share – adjusted weighted-average common shares | ||||||||
| Basic net income per share | $ | $ | ||||||
| Diluted net income per share | $ | $ | ||||||
There were and 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 anti-dilutive equity awards outstanding during the 13-week and 39-week periods ended September 29, 2018.
There were less than 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 net shares issued as a result of exercises and releases of equity awards for the 13-week period ended September 29, 2018.
There were and 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 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 39-week period ended September 28, 2019.
There were ESPP shares issued from outstanding Treasury stock during the 39-week period ended September 29, 2018.
| 4. | Segment Information |
The
Company has identified
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 $
9
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 September 28, 2019 | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||
| 13-Weeks Ended September 29, 2018 | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||
| 39-Weeks Ended September 28, 2019 | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||
| 39 -Weeks Ended September 29, 2018 | ||||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||
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:
| 13-Weeks Ended | 39-Weeks Ended | |||||||||||||||
| September 28, | September 29, | September 28, | September 29, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||
| EMEA | ||||||||||||||||
| APAC | ||||||||||||||||
| Net sales to external customers | $ | $ | $ | $ | ||||||||||||
10
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 | $ | $ | $ | $ | ||||||||||||
| September 29, 2018 | ||||||||||||||||
| Property and equipment, net | $ | $ | $ | $ | ||||||||||||
| 5. | Warranty Reserves |
The Company’s
products sold are generally covered by a standard warranty for periods ranging from
| 13-Weeks Ended | ||||||||
| September 28, | September 29, | |||||||
| 2019 | 2018 | |||||||
| Balance - beginning of period | $ | $ | ||||||
| Accrual for products sold during the period(1) | ||||||||
| Expenditures | ( | ) | ( | ) | ||||
| Balance - end of period | $ | $ | ||||||
| 39-Weeks Ended | ||||||||
| September 28, | September 29, | |||||||
| 2019 | 2018 | |||||||
| Balance - beginning of period | $ | $ | ||||||
| Accrual for products sold during the period(1) | ||||||||
| Expenditures | ( | ) | ( | ) | ||||
| Balance - end of period | $ | $ | ||||||
| (1) |
| 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
$
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.
11
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 $
The Company recorded
income tax expense of $
| 8. | Marketable Securities |
The Financial Accounting Standards Board (“FASB”) ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:
| Level 1 | Unadjusted quoted prices in active markets for the identical asset or liability |
12
| Level 2 | Observable inputs for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability |
| Level 3 | Unobservable inputs for the asset or liability |
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.
The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Available-for-sale securities measured at fair value on a recurring basis are summarized below:
| Fair Value Measurements as of September 28, 2019 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||
| Agency securities | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Corporate securities | ||||||||||||||||
| Municipal securities | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
| Fair Value Measurements as of December 29, 2018 | ||||||||||||||||
| Total | Level 1 | Level 2 | Level 3 | |||||||||||||
| U.S. Treasury securities | $ | $ | $ | $ | ||||||||||||
| Agency securities | ||||||||||||||||
| Mortgage-backed securities | ||||||||||||||||
| Corporate securities | ||||||||||||||||
| Municipal securities | ||||||||||||||||
| Other | ||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||
13
Marketable securities classified as available-for-sale securities are summarized below:
| Available-For-Sale Securities as of September 28, 2019 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Agency securities | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Corporate securities | ( | ) | ||||||||||||||
| Municipal securities | ( | ) | ||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
| Available-For-Sale Securities as of December 29, 2018 | ||||||||||||||||
| Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
| U.S. Treasury securities | $ | $ | $ | ( | ) | $ | ||||||||||
| Agency securities | ( | ) | ||||||||||||||
| Mortgage-backed securities | ( | ) | ||||||||||||||
| Corporate securities | ( | ) | ||||||||||||||
| Municipal securities | ( | ) | ||||||||||||||
| Other | ( | ) | ||||||||||||||
| Total | $ | $ | $ | ( | ) | $ | ||||||||||
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 $
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.
| 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 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Agency securities | ( | ) | ( | ) | ||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ||||||||||||
| Corporate securities | ( | ) | ( | ) | ||||||||||||
| Municipal securities | ( | ) | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Total | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| 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 | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
| Agency securities | ( | ) | ( | ) | ||||||||||||
| Mortgage-backed securities | ( | ) | ( | ) | ||||||||||||
| Corporate securities | ( | ) | ( | ) | ||||||||||||
| Municipal securities | ( | ) | ( | ) | ||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Total | $ | ( | ) | $ | $ | ( | ) | $ | ||||||||
The amortized cost and fair value of marketable securities at September 28, 2019, by maturity, are shown below.
| Amortized Cost | Fair Value | |||||||
| Due in one year or less | $ | $ | ||||||
| Due after one year through five years | ||||||||
| Due after five years through ten years | ||||||||
| Due after ten years | ||||||||
| $ | $ | |||||||
15
| 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:
| 13-Weeks Ended September 28, 2019 | ||||||||||||
| Foreign Currency Translation Adjustment | Net unrealized gains (losses) on available-for-sale securities | Total | ||||||||||
| Beginning Balance | $ | $ | ( | ) | $ | |||||||
| Other comprehensive income before reclassification, net of income tax expense of $657 | ( | ) | ( | ) | ||||||||
| Amounts reclassified from accumulated other comprehensive income | ( | ) | ( | ) | ||||||||
| Net current-period other comprehensive income | ( | ) | ( | ) | ||||||||
| Ending Balance | $ | $ | $ | |||||||||
| 39-Weeks Ended September 28, 2019 | ||||||||||||
| Foreign Currency Translation Adjustment | Net unrealized gains (losses) on available-for-sale securities | Total | ||||||||||
| Beginning Balance | $ | $ | ( | ) | $ | |||||||
| Other comprehensive income before reclassification, net of income tax expense of $5,968 | ( | ) | ||||||||||
| Amounts reclassified from accumulated other comprehensive income | ( | ) | ( | ) | ||||||||
| Net current-period other comprehensive income | ( | ) | ||||||||||
| Ending Balance | $ | $ | $ | |||||||||
The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 39-week periods ended September 28, 2019:
| 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 | $ | Other income (expense) | ||||
| ( | ) | Income tax benefit (provision) | ||||
| $ | 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 | $ | Other income (expense) | ||||
| Income tax benefit (provision) | ||||||
| $ | Net of tax | |||||
16
|
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 | 39-Weeks Ended | |||||||||||||||
| September 28, | September 29, | September 28, | September 29, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Auto PND | % | % | % | % | ||||||||||||
| Auto OEM | % | % | % | % | ||||||||||||
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 | 39-Weeks Ended | |||||||||||||||
| September 28, | September 29, | September 28, | September 29, | |||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| Point in time | $ | $ | $ | $ | ||||||||||||
| Over time | ||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||
17
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:
| 39-Weeks Ended | ||||||||
| September 28, | ||||||||
| 2019 | ||||||||
| Deferred Revenue(1) | Deferred Costs(2) | |||||||
| Balance, beginning of period | $ | $ | ||||||
| Deferrals in period | ||||||||
| Recognition of deferrals in period | ( | ) | ( | ) | ||||
| Balance, end of period | $ | $ | ||||||
| (1) |
| (2) |
Of the $
| 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
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.
| 13-Weeks Ended | 39-Weeks Ended | |||||||
| |
|
September 28, | |
|
September 28, | |
||
| 2019 | 2019 | |||||||
| Operating lease cost(1) | $ | $ | ||||||
| (1) |
18
The following table represents the components of leases that are recognized on the Company’s Condensed Consolidated Balance Sheets as of September 28, 2019.
| September 28, | ||||
| 2019 | ||||
| Operating lease right-of-use assets | $ | |||
| Other accrued expenses | $ | |||
| Noncurrent operating lease liabilities | ||||
| Total lease liabilities | $ | |||
| Weighted average remaining lease term | ||||
| Weighted average discount rate | % | |||
The following table represents the maturity of lease liabilities.
| Fiscal Year | Lease payments | |||
| 2019, excluding the 39-weeks ended September 28, 2019 | $ | |||
| 2020 | ||||
| 2021 | ||||
| 2022 | ||||
| 2023 | ||||
| Thereafter | ||||
| Total | $ | |||
| Less: imputed interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
The following table presents supplemental cash flow and noncash information related to leases.
| 39-Weeks Ended | ||||
| September 28, | ||||
| 2019 | ||||
| Cash paid for amounts included in the measurement of operating lease liabilities(2) | $ | |||
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | |||
| (2) |
| 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 $
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.
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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.
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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.
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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”.
29
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) |
32
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
33
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