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 31, 2018

 

or

 

☐

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

  

For the transition period from  ____to ____

 

Commission file number 0-31983

 

GARMIN LTD.

(Exact name of Company as specified in its charter)

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

  

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

 

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [✓] NO [ ]

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting 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 30, 2018

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

 

 

Garmin Ltd.

Form 10-Q

Quarter Ended March 31, 2018

 

Table of Contents 

 

Part I - Financial Information		Page
Item 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Balance Sheets at March 31, 2018 and December 30, 2017 (Unaudited)	3
	Condensed Consolidated Statements of Income for the 13-weeks ended March 31, 2018 and April 1, 2017 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive Income for the 13-weeks ended March 31, 2018 and April 1, 2017 (Unaudited)	5
	Condensed Consolidated Statements of Cash Flows for the 13-weeks ended March 31, 2018 and April 1, 2017 (Unaudited)	6
	Notes to Condensed Consolidated Financial Statements (Unaudited)	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.	Controls and Procedures	26
Part II - Other Information
Item 1.	Legal Proceedings	28
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	29
Item 5.	Other Information	29
Item 6.	Exhibits	29
Signature Page		30
Index to Exhibits		31

 

 

 

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 31, 2018				December 30, 2017
Assets
Current assets:
Cash and cash equivalents		$	898,981			$	891,488
Marketable securities			167,745				161,687
Accounts receivable, net			409,704				590,882
Inventories, net			547,412				517,644
Deferred costs			29,327				30,525
Prepaid expenses and other current assets			138,114				153,912
Total current assets			2,191,283				2,346,138
Property and equipment, net			604,813				595,684
Restricted cash			279				271
Marketable securities			1,309,185				1,260,033
Deferred income taxes			199,090				195,981
Noncurrent deferred costs			32,428				33,029
Intangible assets, net			421,006				409,801
Other assets			97,138				107,352
Total assets		$	4,855,222			$	4,948,289
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	136,132			$	169,640
Salaries and benefits payable			90,137				102,802
Accrued warranty costs			35,422				36,827
Accrued sales program costs			56,266				93,250
Deferred revenue			98,660				103,140
Accrued royalty costs			17,445				32,204
Accrued advertising expense			16,007				30,987
Other accrued expenses			69,949				93,652
Income taxes payable			37,825				33,638
Dividend payable			—				95,975
Total current liabilities			557,843				792,115
Deferred income taxes			74,714				76,612
Noncurrent income taxes			140,368				138,295
Noncurrent deferred revenue			83,222				87,060
Other liabilities			1,882				1,788
Stockholders' equity:
Shares, CHF 0.10 par value, 198,077 shares authorized and issued;
188,521 shares outstanding at March 31, 2018;
and 188,189 shares outstanding at December 30, 2017;			17,979				17,979
Additional paid-in capital			1,818,532				1,828,386
Treasury stock			(450,160	)			(468,818	)
Retained earnings			2,546,400				2,418,444
Accumulated other comprehensive income			64,442				56,428
Total stockholders’ equity			3,997,193				3,852,419
Total liabilities and stockholders' equity		$	4,855,222			$	4,948,289

 

See accompanying notes.

 

  

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Net sales		$	710,872			$	641,510
Cost of goods sold			284,337				268,704
Gross profit			426,535				372,806
Advertising expense			25,311				31,525
Selling, general and administrative expense			117,065				102,051
Research and development expense			141,957				122,202
Total operating expense			284,333				255,778
Operating income			142,202				117,028
Other income (expense):
Interest income			10,227				8,444
Foreign currency gains (losses)			816				(37,497	)
Other income			735				400
Total other income (expense)			11,778				(28,653	)
Income before income taxes			153,980				88,375
Income tax provision (benefit)			24,606				(150,029	)
Net income		$	129,374			$	238,404
Net income per share:
Basic		$	0.69			$	1.27
Diluted		$	0.68			$	1.26
Weighted average common
shares outstanding:
Basic			188,322				188,333
Diluted			189,292				189,031

 

See accompanying notes. 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Net income		$	129,374			$	238,404
Foreign currency translation adjustment			23,500				62,614
Change in fair value of available-for-sale marketable securities, net of deferred taxes			(15,034	)			6,901
Comprehensive income		$	137,840			$	307,919

 

See accompanying notes.

 

 

 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Operating activities:
Net income		$	129,374			$	238,404
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			16,014				14,658
Amortization			7,132				7,070
(Gain) loss on sale or disposal of property and equipment			(15	)			8
Provision for doubtful accounts			57				(294	)
Provision for obsolete and slow moving inventories			3,959				7,193
Unrealized foreign currency (gain) loss			(517	)			42,571
Deferred income taxes			416				(171,432	)
Stock compensation expense			13,440				8,206
Realized losses on marketable securities			196				291
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable			187,693				135,253
Inventories			(26,455	)			(41,398	)
Other current and non-current assets			9,037				7,534
Accounts payable			(36,708	)			(44,180	)
Other current and non-current liabilities			(99,935	)			(81,038	)
Deferred revenue			(8,368	)			(12,041	)
Deferred costs			1,807				2,647
Income taxes payable			17,063				6,943
Net cash provided by operating activities			214,190				120,395
Investing activities:
Purchases of property and equipment			(26,336	)			(25,538	)
Proceeds from sale of property and equipment			121				7
Purchase of intangible assets			(1,622	)			(1,222	)
Purchase of marketable securities			(140,623	)			(96,049	)
Redemption of marketable securities			65,253				109,526
Acquisitions, net of cash acquired			(9,417	)			—
Net cash used in investing activities			(112,624	)			(13,276	)
Financing activities:
Dividends			(96,146	)			(96,028	)
Proceeds from issuance of treasury stock related to equity awards			1,926				—
Purchase of treasury stock related to equity awards			(6,562	)			(3,452	)
Purchase of treasury stock under share repurchase plan			—				(27,873	)
Net cash used in financing activities			(100,782	)			(127,353	)
Effect of exchange rate changes on cash, cash equivalents, and restricted cash			6,717				6,932
Net increase (decrease) in cash, cash equivalents, and restricted cash			7,501				(13,302	)
Cash, cash equivalents, and restricted cash at beginning of period			891,759				846,996
Cash, cash equivalents, and restricted cash at end of period		$	899,260			$	833,694

 

See accompanying notes. 

 

 

Garmin Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

March 31, 2018

(In thousands, except per share information) 

  

1.

Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week period ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 29, 2018.

 

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

 

The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore, the financial results of certain 53-week fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. The quarters ended March 31, 2018 and April 1, 2017 both contain operating results for 13 weeks.

 

As previously announced and discussed below within the “Recently Adopted Accounting Standards” section of this footnote, effective in the 13-week period ended March 31, 2018, we adopted the requirements of Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606), using the full retrospective method. All amounts and disclosures set forth in this Form 10-Q reflect these changes. Further, as a result of the adoption of certain other accounting standards described below, effective in the 13-week period ended March 31, 2018, certain amounts in prior periods have been reclassified to conform to the current period presentation.

 

Recently Adopted Accounting Standards

 

Revenue from Contracts with Customers

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The FASB issued several updates amending or relating to ASU 2014-09 (collectively, the “new revenue standard”). The Company has adopted the new revenue standard effective in the 13-week period ending March 31, 2018 using the full retrospective method, which requires the Company to restate each prior reporting period presented in future financial statement issuances. The impacts of the new revenue standard relate to our accounting for certain arrangements within the auto segment.

 

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

 

 

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

 

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

 

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

 

		13-Weeks Ended April 1, 2017
		As reported				Restated(1)				Impact
Net sales		$	638,546			$	641,510			$	2,964
Gross profit			372,123				372,806				683
Operating income			116,345				117,028				683
Income tax (benefit)			(150,120	)			(150,029	)			91
Net income		$	237,812			$	238,404			$	592
Diluted net income per share		$	1.26			$	1.26			$	—

 

(1)

The Restated results presented above are restated under ASC Topic 606. Amounts related to the income tax effect of the new standard that were previously disclosed as the anticipated adoption impact in our press release attached as Exhibit 99.1 to our Current Report on Form 8-K filed with the Securities and Exchange Commission (SEC) on February 21, 2018 have been revised in this Note by immaterial amounts in connection with our adoption of ASC Topic 606.

  

		December 30, 2017												December 31, 2016
		As reported				Restated(2)				Impact				As reported				Restated(2)				Impact
Current assets:
Deferred costs		$	48,312			$	30,525			$	(17,787	)		$	47,395			$	34,665			$	(12,730	)
Total current assets			2,363,925				2,346,138				(17,787	)			2,263,016				2,250,286				(12,730	)
Deferred income taxes			199,343				195,981				(3,361	)			110,293				107,655				(2,638	)
Noncurrent deferred costs			73,851				33,029				(40,822	)			56,151				30,934				(25,217	)
Total assets		$	5,010,260			$	4,948,289			$	(61,971	)		$	4,525,133			$	4,484,549			$	(40,584	)
Current liabilities:
Deferred revenue			139,681				103,140				(36,541	)			146,564				118,496				(28,068	)
Total current liabilities			828,656				792,115				(36,541	)			782,735				754,667				(28,068	)
Deferred income taxes			75,215				76,612				1,396				61,220				62,617				1,397
Non-current deferred revenue			163,840				87,060				(76,780	)			140,407				91,238				(49,169	)
Retained earnings			2,368,874				2,418,444				49,570				2,056,702				2,092,221				35,519
Accumulated other comprehensive income			56,045				56,428				382				(36,761	)			(37,024	)			(263	)
Total stockholders' equity			3,802,466				3,852,419				49,954				3,418,003				3,453,259				35,256
Total liabilities and stockholders’ equity		$	5,010,260			$	4,948,289			$	(61,971	)		$	4,525,133			$	4,484,549			$	(40,584	)

 

 

 

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

 

(2)

The Restated results presented above are restated under ASC Topic 606. Amounts related to the income tax effect of the new standard that were previously disclosed as the anticipated adoption impact in Note 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements of our fiscal 2017 Annual Report on Form 10-K filed with the SEC on February 21, 2018 have been revised in this Note by immaterial amounts in connection with our adoption of ASC Topic 606.

 

Financial Instruments – Recognition, Measurement, Presentation, and Disclosure

 

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The Company has adopted the new standard effective in the 13-week period ending March 31, 2018. The adoption did not have a material impact on the Company’s financial position or results of operations. 

 

Statement of Cash Flows

 

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. In November 2016, the FASB issued Accounting Standards Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”), which requires restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling changes in the total amounts within the statement of cash flows. The Company has adopted the new standards effective in the 13-week period ending March 31, 2018. The adoption of ASU 2016-15 did not have a material impact to the Company’s statements of cash flows. The amendments of ASU 2016-18 were applied using a retrospective transition method, resulting in immaterial changes to the presentation of the Company’s statements of cash flows.

 

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

  

Income Taxes

 

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The Company has adopted the new standard effective beginning in the 13-week period ending March 31, 2018, which resulted in a reclassification of $1,700 of certain prepaid tax balances in a cumulative effect to retained earnings as of the date of adoption. 

 

 

Income Statement – Reporting Comprehensive Income

 

In February 2018, the FASB issued Accounting Standards Update No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU 2018-02”), which allows for stranded tax effects in accumulated other comprehensive income resulting from the U.S. Tax Cuts and Jobs Act to be reclassified to retained earnings. The Company has elected to early adopt the new standard effective in the 13-week period ending March 31, 2018, resulting in reclassification of approximately $450 from accumulated other comprehensive income into retained earnings. The tax effects that were reclassified only relate to amounts resulting from the U.S. Tax Cuts and Jobs Act.

 

Significant Accounting Policies

 

For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017. Other than the policies discussed below, there were no material changes to the Company’s significant accounting policies during the 13-week period ended March 31, 2018.

 

Revenue Recognition

 

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

 

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

 

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

 

 

Deferred Revenues and Costs

 

Deferred revenue consists primarily of the transaction price allocated to performance obligations that are recognized over a period of time basis as discussed in the Revenue Recognition portion of this footnote. Billings associated with such items are typically completed upon the transfer of control of promised products or services to the customer and recorded to accounts receivable until payment is received. Deferred costs primarily refer to the royalties incurred by the Company associated with the aforementioned unsatisfied performance obligations, which are amortized over the same period as the revenue is recognized. The Company typically pays the associated royalties either monthly or quarterly in arrears, on a per item shipped or installed basis.

 

The Company applies a practical expedient, as permitted within ASC 340, to expense as incurred the incremental costs to obtain a contract when the amortization period of the asset that would have otherwise been recognized is one year or less.

 

Shipping and Handling Costs

 

Shipping and handling activities are typically performed before the customer obtains control of the good, and the related costs are therefore expensed as incurred. Shipping and handling costs are included in cost of goods sold in the accompanying condensed consolidated financial statements.

 

2.

Inventories

 

The components of inventories consist of the following: 

		March 31, 2018				December 30, 2017
Raw materials		$	190,213			$	179,659
Work-in-process			84,431				75,754
Finished goods			272,768				262,231
Inventory, net of reserves		$	547,412			$	517,644

 

 

 

3.

Earnings Per Share

 

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

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Numerator:
Numerator for basic and diluted net income per share - net income		$	129,374			$	238,404
Denominator:
Denominator for basic net income per share – weighted-average common shares			188,322				188,333
Effect of dilutive securities –
stock options, stock appreciation rights and restricted stock units			970				698
Denominator for diluted net income per share – adjusted weighted-average common shares			189,292				189,031
Basic net income per share		$	0.69			$	1.27
Diluted net income per share		$	0.68			$	1.26

 

There were 0 and 2,593 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended March 31, 2018 and April 1, 2017, respectively.

 

There were 332 and 150 net shares issued as a result of exercises and releases of equity awards for the 13-week periods ended March 31, 2018 and April 1, 2017, respectively.

  

4.

Segment Information

 

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

 

			Reportable Segments
			Outdoor				Fitness				Marine				Auto				Aviation				Total
13-Weeks Ended 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
13-Weeks Ended April 1, 2017
Net sales		$	115,875			$	137,831			$	104,445			$	160,488			$	122,871			$	641,510
Gross profit			73,469				77,741				59,747				70,616				91,233				372,806
Operating income			34,451				18,472				18,145				7,352				38,608				117,028

 

  

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

 

Net sales to external customers and property and equipment, net by geographic region are as follows as of and for the 13-week periods ended March 31, 2018 and April 1, 2017. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:

 

 

		Americas				APAC				EMEA				Total
March 31, 2018
Net sales to external customers		$	345,975			$	118,985			$	245,912			$	710,872
Property and equipment, net		$	388,531			$	176,245			$	40,037			$	604,813
April 1, 2017
Net sales to external customers		$	324,630			$	91,545			$	225,335			$	641,510
Property and equipment, net		$	312,630			$	152,804			$	38,406			$	503,840

  

5.

Warranty Reserves

 

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

 

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Balance - beginning of period		$	36,827			$	37,233
Accrual for products sold during the period			10,012				8,200
Expenditures			(11,417	)			(11,006	)
Balance - end of period		$	35,422			$	34,427

 

 

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 31, 2018 was approximately $325,200. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

 

Contingencies

 

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

 

 

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 31, 2018. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.

 

 

7.

Income Taxes

 

The Company recorded an income tax expense of $24,606 in the 13-week period ended March 31, 2018, compared to an income tax benefit of $150,029 in the 13-week period ended April 1, 2017, which included a $168,755 income tax benefit due to the revaluation of certain Switzerland deferred tax assets. The effective tax rate was 16.0% in the first quarter of 2018, compared to (169.8%) in the first quarter of 2017. Excluding the effect of the $168,755 revaluation of deferred tax assets in first quarter of 2017, the first quarter of 2018 effective tax rate decreased by 520 basis points primarily due to the reduction of the U.S. corporate tax rate and the net release of uncertain tax position reserves.

 

On December 22, 2017, the Tax Cuts and Jobs Act was enacted into law in the United States. Due to the complexities of the new tax legislation, the Securities and Exchange Commission has issued Staff Accounting Bulletin No. 118 (“SAB 118”) which allows for the recognition of provisional amounts during a measurement period. The Company recorded a provisional re-measurement of its deferred tax assets and liabilities in the fourth quarter of 2017. Income tax expense recorded in the first quarter of 2018 includes the impact of the new tax legislation as currently interpreted by the Company. The Company will continue to assess the impact of the new tax legislation, as well as any related future regulations and rules, and will record any additional impacts as identified during the measurement period, if necessary. The Company does not expect any such potential adjustments in the future periods will materially impact the Company’s financial condition or result of operations.

 

 

8.

Marketable Securities

 

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

 

Level 1

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

 

Level 2

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

 

Level 3

Unobservable inputs for the asset or liability

 

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

 

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

 

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

 

		Fair Value Measurements as of March 31, 2018
		Total				Level 1				Level 2				Level 3
U.S. Treasury securities		$	29,058			$	—			$	29,058			$	—
Agency securities			41,744				—				41,744				—
Mortgage-backed securities			158,839				—				158,839				—
Corporate securities			892,848				—				892,848				—
Municipal securities			185,586				—				185,586				—
Other			168,855				—				168,855				—
Total		$	1,476,930			$	—			$	1,476,930			$	—

   

		Fair Value Measurements as
		of December 30, 2017
		Total				Level 1				Level 2				Level 3
U.S. Treasury securities		$	19,337			$	—			$	19,337			$	—
Agency securities			43,361				—				43,361				—
Mortgage-backed securities			174,615				—				174,615				—
Corporate securities			816,793				—				816,793				—
Municipal securities			186,105				—				186,105				—
Other			181,509				—				181,509				—
Total		$	1,421,720			$	—			$	1,421,720			$	—

 

 

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

 

		Available-For-Sale Securities as of March 31, 2018
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
U.S. Treasury securities		$	29,439			$	—			$	(381	)		$	29,058
Agency securities			42,901				—				(1,156	)			41,745
Mortgage-backed securities			166,458				6				(7,625	)			158,839
Corporate securities			919,920				45				(27,117	)			892,848
Municipal securities			188,728				14				(3,157	)			185,585
Other			171,641				1				(2,787	)			168,855
Total		$	1,519,087			$	66			$	(42,223	)		$	1,476,930

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

 

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

 

The Company recognizes the credit component of other-than-temporary impairments of debt securities in “Other Income” and the noncredit component in “Other comprehensive income (loss)” for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During fiscal 2017 and the 13-week period ended March 31, 2018, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and fair value of the securities at an unrealized loss position at March 31, 2018 were $1,466,270 and $1,424,047 respectively. Approximately 82% of securities in our portfolio were at an unrealized loss position at March 31, 2018. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no material deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no material impairment has been recorded in the accompanying condensed consolidated statement of income.

 

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

 

The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of March 31, 2018 and December 30, 2017.

 

 

		As of March 31, 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		$	(202	)		$	19,748			$	(179	)		$	6,319
Agency securities			(243	)			16,022				(913	)			25,723
Mortgage-backed securities			(711	)			17,631				(6,914	)			140,289
Corporate securities			(11,562	)			538,556				(15,555	)			341,137
Municipal securities			(1,786	)			139,591				(1,371	)			40,649
Other			(2,784	)			136,448				(3	)			1,934
Total		$	(17,288	)		$	867,996			$	(24,935	)		$	556,051

 

		As of December 30, 2017
		Less than 12 Consecutive Months								12 Consecutive Months or Longer
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
U.S. Treasury securities		$	(111	)		$	12,966			$	(143	)		$	6,371
Agency securities			(168	)			16,097				(663	)			25,972
Mortgage-backed securities			(503	)			19,628				(5,365	)			153,835
Corporate securities			(4,562	)			439,174				(9,228	)			347,052
Municipal securities			(1,027	)			125,819				(977	)			38,167
Other			(2,219	)			136,147				(4	)			2,579
Total		$	(8,590	)		$	749,831			$	(16,380	)		$	573,976

 

The amortized cost and fair value of marketable securities at March 31, 2018, by maturity, are shown below.

 

		Amortized Cost				Fair Value
Due in one year or less		$	168,370			$	167,745
Due after one year through five years			1,175,500				1,143,859
Due after five years through ten years			160,650				151,195
Due after ten years			14,567				14,131
		$	1,519,087			$	1,476,930

 

 

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 31, 2018:

 

		13-Weeks Ended March 31, 2018
		Foreign Currency Translation Adjustment				Net unrealized gains (losses) on available-for- sale securities				Total
Beginning Balance		$	79,292			$	(22,864	)		$	56,428
Other comprehensive income before reclassification, net of income tax benefit of $2,416			23,500				(14,856	)			8,644
Amounts reclassified from accumulated other comprehensive income			—				(178	)			(178	)
Net current-period other comprehensive income			23,500				(15,034	)			8,466
Reclassification of tax effects due to adoption of ASU 2018-02			—				(452	)			(452	)
Ending Balance		$	102,792			$	(38,350	)		$	64,442

 

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week period ended March 31, 2018:

13-Weeks Ended March 31, 2018
Details About Accumulated Other Comprehensive Income Components			Amount Reclassified from Accumulated Other Comprehensive Income			Affected Line Item in the Statement Where Net Income is Presented
Unrealized gains (losses) on available-for-sale securities		$	(193	)		Other income (expense)
			371			Income tax benefit (provision)
		$	178			Net of tax

 

10. Revenue

 

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

 

The Company has identified six major product categories – aviation, marine, outdoor, fitness, auto PND, and auto OEM. Note 4 – Segment Information contains disaggregated revenue information of the aviation, marine, outdoor and fitness major product categories, and auto OEM comprised 37% and 33% of the auto segment revenue presented in Note 4 for the 13-weeks ended March 31, 2018, and April 1, 2017, respectively. Auto PND comprised of 63% and 67% of the auto segment revenue presented in Note 4 for the 13-weeks ended March 31, 2018 and April 1, 2017, respectively. Disaggregated revenue by geographic region (Americas, APAC, and EMEA) is also presented in Note 4.

 

 

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

 

		13-Weeks Ended
		March 31, 2018				April 1, 2017
Point in time		$	671,263			$	599,745
Over time			39,609				41,765
Net sales		$	710,872			$	641,510

 

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 13-weeks ended March 31, 2018 are presented below:

 

			13-Weeks Ended
			March 31, 2018
				Deferred Revenue(1)				Deferred Costs(2)
Balance, beginning of period			$	190,200			$	63,554
Deferrals in period				31,291				7,840
Recognition of deferrals in period				(39,609	)			(9,639	)
Balance, end of period			$	181,882			$	61,755

 

 

(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 $39,609 deferred revenue recognized in the 13-weeks ended March 31, 2018, $32,515 was deferred as of the beginning of the period.

 

Approximately two-thirds of the $181,882 of deferred revenue at the end of the period, March 31, 2018, is recognized ratably over a period of three years or less.

 

11. Recently Issued Accounting Pronouncements Not Yet Adopted

 

Leases

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements. The Company does not plan to early adopt the new standard, and therefore will adopt in the Company’s fiscal year ending December 28, 2019.

 

 

Receivables – Nonrefundable Fees and Other Costs

 

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

 

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

 

Overview

 

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

 

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

 

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

 

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

 

 

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 31, 2018				April 1, 2017
Net sales			100	%			100	%
Cost of goods sold			40	%			42	%
Gross profit			60	%			58	%
Advertising expense			4	%			5	%
Selling, general and administrative expense			16	%			16	%
Research and development expense			20	%			19	%
Total operating expense			40	%			40	%
Operating income			20	%			18	%
Other income (expense)			2	%			(4	%)
Income before income taxes			22	%			14	%
Income tax provision (benefit)			3	%			(23	%)
Net income			18	%			37	%

 

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

 

Comparison of 13-weeks ended March 31, 2018 and April 1, 2017

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

 

Net Sales

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017								Year over Year
		Net Sales				% of Revenues				Net Sales				% of Revenues				$ Change				% Change
Outdoor		$	144,258				20	%		$	115,875				18	%		$	28,383				24	%
Fitness			166,035				23	%			137,831				22	%			28,204				20	%
Marine			113,554				16	%			104,445				16	%			9,109				9	%
Auto			141,312				20	%			160,488				25	%			(19,176	)			-12	%
Aviation			145,713				21	%			122,871				19	%			22,842				19	%
Total		$	710,872				100	%		$	641,510				100	%		$	69,362				11	%

 

Net sales increased 11% for the 13-week period ended March 31, 2018 when compared to the year-ago quarter. The outdoor, aviation, marine, and fitness segments collectively increased by 18%, contributing 80% of total revenue. Fitness was the largest portion of our revenue mix at 23% in the first quarter of 2018 compared to 22% in the first quarter of 2017. Auto revenue represented the largest portion of our revenue mix in the first quarter of 2017 at 25% and declined to 20% in the first quarter of 2018.

 

Total unit sales decreased to 2,956 in the first quarter of 2018 from 3,099 in the same period of 2017.

 

Auto segment revenue decreased 12% from the year-ago quarter, primarily due to the ongoing PND market contraction. The current quarter marine increase of 9% was primarily driven by sales of the newly acquired Navionics business. Fitness segment revenues increased 20% from the year-ago quarter, primarily driven by advanced wearables and newly introduced products. Revenues in the outdoor segment increased 24% from the year-ago quarter primarily driven by significant growth in the wearable category. Aviation revenues increased 19% when compared to the year-ago quarter, driven by strong sales across most product lines.

 

 

Cost of Goods Sold

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017								Year over Year
		Cost of Goods				% of Revenues				Cost of Goods				% of Revenues				$ Change				% Change
Outdoor		$	50,973				35	%		$	42,406				37	%		$	8,567				20	%
Fitness			69,434				42	%			60,090				44	%			9,344				16	%
Marine			46,871				41	%			44,698				43	%			2,173				5	%
Auto			80,300				57	%			89,872				56	%			(9,572	)			-11	%
Aviation			36,759				25	%			31,638				26	%			5,121				16	%
Total		$	284,337				40	%		$	268,704				42	%		$	15,633				6	%

 

Cost of goods sold increased 6% in absolute dollars compared to the prior year quarter. The increase in revenues outpaced the increase in cost of goods sold, which resulted in a 190 basis point decrease in cost of goods sold as a percent of revenues compared to the year-ago quarter.

 

In the auto segment, the decline in cost of goods sold was largely consistent with the segment revenue declines. In the marine segment, the decrease in cost of goods sold as a percent of revenue primarily resulted from the impact of Navionics sales on product mix. In the outdoor and fitness segments, the decreases in cost of goods sold as a percent of revenue resulted from a shift in product mix toward higher margin products.  The aviation segment increase in cost of goods was largely consistent with the increase in sales.

 

Gross Profit

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017								Year over Year
		Gross Profit				% of Revenues				Gross Profit				% of Revenues				$ Change				% Change
Outdoor		$	93,285				65	%		$	73,469				63	%		$	19,816				27	%
Fitness			96,601				58	%			77,741				56	%			18,860				24	%
Marine			66,683				59	%			59,747				57	%			6,936				12	%
Auto			61,012				43	%			70,616				44	%			(9,604	)			-14	%
Aviation			108,954				75	%			91,233				74	%			17,721				19	%
Total		$	426,535				60	%		$	372,806				58	%		$	53,729				14	%

 

Gross profit dollars in the first quarter of 2018 increased 14% while gross margin increased 190 basis points compared to the first quarter of 2017. Gross margin remained relatively flat across the auto and aviation segments, while gross margin in the outdoor, fitness, and marine segments increased primarily due to product mix within those segments, as discussed above.

 

Advertising Expense

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017
		Advertising								Advertising								Year over Year
		Expense				% of Revenues				Expense				% of Revenues				$ Change				% Change
Outdoor		$	5,800				4	%		$	5,002				4	%		$	798				16	%
Fitness			9,685				6	%			13,926				10	%			(4,241	)			-30	%
Marine			5,285				5	%			5,622				5	%			(337	)			-6	%
Auto			3,230				2	%			5,478				3	%			(2,248	)			-41	%
Aviation			1,311				1	%			1,497				1	%			(186	)			-12	%
Total		$	25,311				4	%		$	31,525				5	%		$	(6,214	)			-20	%

 

Advertising expense decreased 20% in absolute dollars compared to the year-ago quarter. The overall decrease in absolute dollars was driven primarily by decreased cooperative advertising associated with customer mix and fitness media, partially offset by an increase in outdoor media.

 

 

Selling, General and Administrative Expense

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017
			Selling, General &								Selling, General &								Year over Year
			Admin. Expenses				% of Revenues				Admin. Expenses				% of Revenues				$ Change				% Change
Outdoor		$	26,056				18	%		$	20,669				18	%		$	5,387				26	%
Fitness			31,295				19	%			26,550				19	%			4,745				18	%
Marine			28,453				25	%			21,538				21	%			6,915				32	%
Auto			22,059				16	%			26,604				17	%			(4,545	)			-17	%
Aviation			9,202				6	%			6,690				5	%			2,512				38	%
Total		$	117,065				16	%		$	102,051				16	%		$	15,014				15	%

 

Selling, general and administrative expense increased 15% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The absolute dollar increase was primarily attributable to personnel costs and expenses from prior year acquisitions in the first quarter of 2018. All segments, except for marine, were relatively flat as a percent of revenues. The marine segment increase as a percent of revenues was primarily due to expenses resulting from prior year acquisitions in the first quarter of 2018.

 

Research and Development Expense

 

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017
		Research &								Research &								Year over Year
		Development				% of Revenues				Development				% of Revenues				$ Change				% Change
Outdoor		$	17,607				12	%		$	13,347				12	%		$	4,260				32	%
Fitness			22,247				13	%			18,793				14	%			3,454				18	%
Marine			19,814				17	%			14,442				14	%			5,372				37	%
Auto			32,255				23	%			31,182				19	%			1,073				3	%
Aviation			50,034				34	%			44,438				36	%			5,596				13	%
Total		$	141,957				20	%		$	122,202				19	%		$	19,755				16	%

 

Research and development expense increased 16% primarily due to engineering personnel costs related to our wearable product offerings, aviation, and expenses resulting from prior year acquisitions within the marine segment. In absolute dollars, research and development costs increased $19.8 million when compared with the year-ago quarter and increased 90 basis points as a percent of revenue. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

 

Operating Income 

		13-weeks ended March 31, 2018								13-weeks ended April 1, 2017								Year over Year
		Operating Income				% of Revenues				Operating Income				% of Revenues				$ Change				% Change
Outdoor		$	43,822				30	%		$	34,451				30	%		$	9,371				27	%
Fitness			33,374				20	%			18,472				13	%			14,902				81	%
Marine			13,131				12	%			18,145				17	%			(5,014	)			-28	%
Auto			3,468				2	%			7,352				5	%			(3,884	)			-53	%
Aviation			48,407				33	%			38,608				31	%			9,799				25	%
Total		$	142,202				20	%		$	117,028				18	%		$	25,174				22	%

 

Operating income increased 22% in absolute dollars and increased 180 basis points as a percent of revenue when compared to the first quarter of 2017. The growth in operating income on an absolute dollar and percent of revenue basis resulted from revenue growth and an increase in gross margin percent, while operating expenses as a percent of revenue remained relatively flat, as discussed above

 

 

Other Income (Expense)

 

		13-weeks ended				13-weeks ended
		March 31, 2018				April 1, 2017
Interest income		$	10,227			$	8,444
Foreign currency gains (losses)			816				(37,497	)
Other			735				400
Total		$	11,778			$	(28,653	)

 

The average return on cash and investments, including interest and capital gains/losses, during the first quarter of 2018 was 1.7% compared to 1.4% during the same quarter of 2017.  Interest income increased primarily due to slightly higher yields on fixed-income securities. 

 

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

 

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 other currencies and timing of transactions.

 

The $37.5 million currency loss recognized in the first quarter of 2017 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 April 1, 2017. During this period, the U.S. Dollar weakened 7.1% against the Taiwan Dollar, resulting in a loss of $42.9 million, while the U.S. Dollar weakened 1.3% against the Euro and 1.7% against the British Pound Sterling, resulting in gains of $2.7 million and $0.8 million, respectively. The remaining net currency gain of $1.9 million was related to other currencies and timing of transactions.  

 

Income Tax Provision

 

The Company recorded an income tax expense of $24.6 million in the 13-week period ended March 31, 2018, compared to income tax benefit of $150.0 million in the 13-week period ended April 1, 2017, which included a $168.8 million income tax benefit due to the revaluation of certain Switzerland deferred tax assets. The effective tax rate was 16.0% in the first quarter of 2018, compared to (169.8%) in the first quarter of 2017. Excluding the effect of the $168.8 million revaluation of deferred tax assets in the first quarter of 2017, the first quarter of 2018 effective tax rate decreased by 520 basis points primarily due to the reduction of the U.S. corporate tax rate, as a result of U.S. tax reform passed in December 2017, and the net release of uncertain tax position reserves.

 

Net Income

 

As a result of the above, net income for the 13-weeks ended March 31, 2018 was $129.4 million compared to $238.4 million for the 13-week period ended April 1, 2017, a decrease of $109 million.

 

 

Liquidity and Capital Resources

 

As of March 31, 2018, we had $2,375.9 million of cash and cash equivalents and marketable securities. We primarily use cash flow from operations, and expect that future cash requirements may be used to fund our capital expenditures, support our working capital requirements, pay dividends, fund strategic acquisitions, and fund share repurchases. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.

 

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 first quarter 2018 and 2017 were approximately 1.7% and 1.5%, respectively. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. See Note 8 for additional information regarding marketable securities.

 

Operating Activities

 

		13-Weeks Ended
		March 31,				April 1,
(In thousands)		2018				2017
Net cash provided by operating activities		$	214,190			$	120,395

 

The $93.8 million increase in cash provided by operating activities in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to the increase in cash provided by working capital of $57.4 million (which included an increase of $52.8 million in net receipts of accounts receivable and a decrease of $11.7 million in cash paid for inventory) and income taxes payable of $10.1 million. Additionally, the year over year decrease in net income of $109.0 million was offset by other non-cash adjustments to net income of $135.3 million, including an income tax benefit of $168.8 million recognized in the first quarter of 2017 related to the revaluation of certain Switzerland deferred tax assets.

 

Investing Activities

 

		13-Weeks Ended
		March 31,				April 1,
(In thousands)		2018				2017
Net cash used in investing activities		$	(112,624	)		$	(13,276	)

 

The $99.3 million increase in cash used in investing activities in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to increased net purchases of marketable securities of $88.8M and cash payments for acquisitions of $9.4 million.

 

Financing Activities

 

		13-Weeks Ended
		March 31,				April 1,
(In thousands)		2018				2017
Net cash used in financing activities		$	(100,782	)		$	(127,353	)

 

The $26.6 million decrease in cash used in financing activities in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to decreased purchases of treasury stock under our share repurchase authorization of $27.9M.

 

 

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, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, Garmin evaluates its estimates, including those related to customer sales programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation. Garmin bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

For a description of the significant accounting policies and methods used in the preparation of the Company’s condensed consolidated financial statements, refer to Note 2, “Summary of Significant Accounting Policies” in the Notes to the Consolidated Financial Statements in Part II, Item 8 and “Critical Accounting Policies and Estimates” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 30, 2017. There were no material changes to the Company’s critical accounting policies and estimates in the 13-week period ended March 31, 2018, other than those discussed in Note 1, “Significant Accounting Policies”.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017. There have been no material changes during the 13-week period ended March 31, 2018 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.

 

Item 4. Controls and Procedures

 

(a)     Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of March 31, 2018, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 31, 2018 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

 

(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

Part II - Other Information

 

Item 1. Legal Proceedings

 

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

 

PulseOn Oy v. Garmin (Europe) Ltd.

 

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

  

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

 

Item 1A. Risk Factors

 

There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 30, 2017. There have been no material changes during the 13-week period ended March 31, 2018 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

 

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

 

(c) Issuer Purchases of Equity Securities

 

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

 

Item 3.

Defaults Upon Senior Securities

 

None

 

 

Item 4.

Mine Safety Disclosures

 

Not applicable

 

Item 5.

Other Information

 

Not applicable

 

Item 6.

Exhibits

 

Exhibit 31.1

Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).

 

Exhibit 31.2

Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).

 

Exhibit 32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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

 

 

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 2, 2018

 

 

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