| Summary of Significant Accounting Policies |
2.
Summary of Significant Accounting Policies
Basis
of Presentation and Principles of Consolidation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States. The accompanying consolidated financial statements reflect the accounts of Garmin Ltd. and its wholly-owned
subsidiaries. All significant inter-company balances and transactions have been eliminated.
At
the Company’s Annual General Meeting on June 10, 2016, the Company’s shareholders approved the cancellation of 10,000,000
registered shares of the Company held by the Company (the “Formation Shares”) and the reduction in par value of each
share of the Company from CHF 10 to CHF 0.10 and the amendment of the Company’s Articles of Association to effect a corresponding
share capital reduction.
Fiscal
Year
The
Company’s fiscal year is based on a 52-53-week period ending on the last Saturday of the calendar year. Due to the fact
that there are not exactly 52 weeks in a calendar year, and there is slightly more than one additional day per year (not including
the effects of leap year) in each calendar year as compared to a 52-week fiscal year, the Company will have a fiscal year comprising
53 weeks in certain fiscal years, as determined by when the last Saturday of the calendar year occurs.
In
those resulting fiscal years that have 53 weeks, the Company will record an extra week of sales, costs, and related financial
activity. Therefore, the financial results of those 53-week fiscal years, and the associated 14-week fourth quarters, will not
be entirely comparable to the prior and subsequent 52-week fiscal years and the associated 13-week quarters. Fiscal years 2017
and 2015 included 52 weeks while fiscal 2016 included 53 weeks.
Use
of Estimates
The
preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign
Currency
Many
Garmin Ltd. subsidiaries utilize currencies other than the United States Dollar (USD) as their functional currency. As required
by the Foreign Currency Matters topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC),
the financial statements of these subsidiaries for all periods presented have been translated into USD, the functional currency
of Garmin Ltd., and the reporting currency herein, for purposes of consolidation at rates prevailing during the year for sales,
costs, and expenses and at end-of-year rates for all assets and liabilities. The effect of this translation is recorded in a separate
component of stockholders’ equity. Cumulative currency translation adjustments of $78,909 and ($9,411) as of December 30,
2017 and December 31, 2016, respectively, have been included in accumulated other comprehensive income in the accompanying consolidated
balance sheets.
Transactions
in foreign currencies are recorded at the approximate rate of exchange at the transaction date. The movements of the Taiwan Dollar
and Euro/British Pound Sterling typically have offsetting impacts on operating income when the currencies move congruently against
the U.S. Dollar due to the use of the Taiwan Dollar for manufacturing costs while the Euro and British Pound Sterling transactions
relate primarily to revenue.
Assets
and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date.
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.
Foreign currency losses recorded in results of operations were $22,579, $31,651, and $23,465 for the years ended December 30,
2017, December 31, 2016, and December 26, 2015, respectively. The loss in fiscal 2017 was due primarily to the USD weakening against
the Taiwan Dollar, which was partially offset by the USD weakening against the Euro and British Pound Sterling. The loss in fiscal
2016 was due primarily to the USD weakening against the Taiwan Dollar and the USD strengthening against the Euro and British Pound
Sterling. The loss in fiscal 2015 was due primarily to the USD strengthening against the Euro and British Pound Sterling, which
was partially offset by the USD strengthening against the Taiwan Dollar.
Earnings
Per Share
Basic
earnings per share amounts are computed based on the weighted-average number of common shares outstanding. For purposes of diluted
earnings per share, the number of shares that would be issued from the exercise of dilutive share-based compensation awards has
been reduced by the number of shares which could have been purchased from the proceeds of the exercise or release at the average
market price of the Company’s stock during the period the awards were outstanding. See Note 10.
Cash
and Cash Equivalents
For
purposes of reporting cash flows, cash and cash equivalents include cash on hand, operating accounts, money market funds, and
securities with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents approximates
fair value, given the short maturity of those instruments.
Trade
Accounts Receivable
The
Company sells its products to retailers, wholesalers, and other customers and extends credit based on its evaluation of the customer’s
financial condition. Potential losses on receivables are dependent on each individual customer’s financial condition.
The Company carries its trade accounts receivable at net realizable value. Typically, its accounts receivable are collected within
80 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential
losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables and (2) reviewing
its high-risk customers. Past due receivable balances are written off when internal collection efforts have been unsuccessful
in collecting the amount due. The Company maintains trade credit insurance to provide security against large losses.
Concentration
of Credit Risk
The
Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Generally, the Company
does not require security when trade credit is granted to customers. Credit losses are provided for in the Company’s consolidated
financial statements and typically have been within management’s expectations. Certain customers are allowed extended terms
consistent with normal industry practice. Most of these extended terms can be classified as either relating to seasonal sales
variations or to the timing of new product releases by the Company.
The
Company’s top ten customers have contributed between 22% and 24% of net sales since 2015. None of the Company’s customers
accounted for more than or equal to 10% of consolidated net sales in the years ended December 30, 2017, December 31, 2016, and
December 26, 2015.
Inventories
Inventories
are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes
down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory
and the estimated net realizable value based upon assumptions about future demand and market conditions. If actual market conditions
are less favorable than those projected by management, additional inventory write-downs may be required. Inventories consisted
of the following:
| |
|
December
30, 2017 |
|
|
December
31, 2016(1) |
|
| Raw materials |
|
$ |
179,659 |
|
|
$ |
152,497 |
|
| Work-in-process |
|
|
75,754 |
|
|
|
61,048 |
|
| Finished
goods |
|
|
262,231 |
|
|
|
271,276 |
|
| Inventory |
|
$ |
517,644 |
|
|
$ |
484,821 |
|
| |
(1) |
Inventory
balances by major class of inventory as of December 31, 2016 have been recast to conform to the current year presentation. |
Property
and Equipment
Property
and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:
| Buildings and improvements |
|
|
39-50 |
|
| Office furniture and
equipment |
|
|
3-5 |
|
| Manufacturing and engineering
equipment |
|
|
5-10 |
|
| Vehicles |
|
|
5 |
|
Long-Lived
Assets
As
required by the Property, Plant and Equipment topic of the FASB ASC, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The carrying
amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset. That assessment is based on the carrying amount of the asset at the date it is tested
for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its
fair value.
The
Intangibles – Goodwill and Other topic of the FASB ASC (ASC Topic 350) requires that goodwill and intangible assets
with indefinite useful lives should not be amortized but rather be tested for impairment at least annually or sooner whenever
events or changes in circumstances indicate that they may be impaired. The Company performs its annual goodwill and intangible
asset impairment tests in the fourth quarter of each year. ASC Topic 350 allows management to first perform a qualitative assessment
(“step zero”) by assessing the qualitative factors of relevant events and circumstances at the reporting unit level
to determine if it is necessary to perform the quantitative goodwill impairment test (“step one”). If factors indicate
that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, then the step one
assessment will be performed. If the fair value of the reporting unit is less than the carrying amount in step one then goodwill
impairment will be recognized and the charge is determined through the “step two” analysis.
Each
of the Company’s operating segments (auto PND, auto OEM, aviation, marine, outdoor, and fitness) represents a distinct reporting
unit. The auto PND market has declined in recent years as competing technologies have emerged and market saturation has occurred.
This has resulted in periods of lower revenues and profits for the Company’s auto PND reporting unit. Considering these
qualitative factors, management performed a step one quantitative goodwill impairment assessment of the auto PND reporting unit
in the fourth quarter of 2017. Management determined that the fair value of the reporting unit was substantially in excess of
its carrying amount, and a step two analysis was therefore not performed. However, considering the uncertainty of future operating
results and/or market conditions deteriorating faster or more drastically than the forecasts utilized in management’s estimation
of fair value, management believes some or all of the approximately $80 million of goodwill associated with the Company’s
auto PND reporting unit is at risk of future impairment. Management concluded that no other reporting units are currently at risk
of impairment.
The
Company did not recognize any material goodwill or intangible asset impairment charges in 2017, 2016, or 2015.
Accounting
guidance also requires that intangible assets with finite lives be amortized over their estimated useful lives and reviewed for
impairment. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from three
to ten years.
Dividends
Under
Swiss corporate law, dividends must be approved by shareholders at the general meeting of the Company’s shareholders.
On
June 9, 2017, the shareholders approved a dividend of $2.04 per share (of which, $1.53 was paid in the Company’s 2017 fiscal
year) payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were
as follows:
The
Company paid dividends in 2017 in the amount of $382,976. Both the dividends paid and the remaining dividend payable were reported
as a reduction of retained earnings.
On
June 10, 2016, the shareholders approved a dividend of $2.04 per share (of which, $1.53 was paid in the Company’s 2016 fiscal
year) payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were
as follows:
The
Company paid dividends in 2016 in the amount of $481,452. Both the dividends paid and the remaining dividend payable were reported
as a reduction of retained earnings.
On
June 5, 2015, the shareholders approved a dividend of $2.04 per share (of which, $1.02 was paid in the Company's 2015 fiscal year)
payable in four equal installments on dates determined by the Board of Directors. The dates determined by the Board were as follows:
The
Company paid dividends in 2015 in the amount of $378,117. Both the dividends paid and the remaining dividend payable were reported
as a reduction of retained earnings.
As
of December 30, 2017 and December 31, 2016, approximately $304,674 of retained earnings was indefinitely restricted from distribution
to stockholders pursuant to the laws of Taiwan.
Intangible
Assets
At
December 30, 2017, and December 31, 2016, the Company had patents, customer related intangibles and other identifiable finite-lived
intangible assets recorded at a cost of $316,705 and $253,473, respectively. Identifiable, finite-lived intangible assets are
amortized over their estimated useful lives on a straight-line basis over three to ten years. Accumulated amortization was $193,886
and $173,023 at December 30, 2017, and December 31, 2016, respectively. Amortization expense on these intangible assets was $20,863,
$14,319, and $7,115 for the years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively. In the next
five years, the amortization expense is estimated to be $18,796, $16,293, $14,167, $10,463, and $8,111, respectively.
The
Company’s excess purchase cost over fair value of net assets acquired (goodwill) was $286,982 at December 30, 2017, and
$224,553 at December 31, 2016.
| |
|
December
30,
2017 |
|
|
December
31,
2016 |
|
| Goodwill
balance at beginning of year |
|
$ |
224,553 |
|
|
$ |
187,791 |
|
| Acquisitions |
|
|
58,332 |
|
|
|
38,061 |
|
| Finalization
of purchase price allocations and effect of foreign currency translation |
|
|
4,097 |
|
|
|
(1,299 |
) |
| Goodwill
balance at end of year |
|
$ |
286,982 |
|
|
$ |
224,553 |
|
Marketable
Securities
Management
determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as
of each balance sheet date.
All
of the Company’s marketable securities were considered available-for-sale at December 30, 2017. Available-for-sale securities
are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income (loss). At
December 30, 2017 and December 31, 2016, cumulative unrealized net losses of $22,864 and $27,350, respectively, were reported
in accumulated other comprehensive income, net of related taxes.
Investments
are reviewed periodically to determine if they have suffered an impairment of value that is considered other than temporary. If
investments are determined to be impaired, a loss is recognized at the date of determination.
Testing
for impairment of investments requires significant management judgment. The identification of potentially impaired investments,
the determination of their fair value and the assessment of whether any decline in value is other than temporary are the key judgment
elements. The discovery of new information and the passage of time can significantly change these judgments. Revisions of impairment
judgments are made when new information becomes known, and any resulting impairment adjustments are made at that time. The economic
environment and volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment.
The
amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts
to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included
in interest income from investments. Realized gains and losses, and credit declines in value judged to be other-than-temporary
are included in other income. The cost of securities sold is based on the specific identification method.
Investments
are discussed in detail in Note 3 of the Notes to Consolidated Financial Statements.
Income
Taxes
The
Company accounts for income taxes using the liability method in accordance with the FASB ASC 740 topic Income Taxes. The
liability method provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases
of assets and liabilities and their carrying amount for financial reporting purposes as measured based on the enacted tax rates
and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance to reduce
deferred tax assets to the amount that is believed more likely than not to be realized.
The
Company accounts for uncertainty in income taxes in accordance with the FASB ASC 740 topic Income Taxes. The
Company recognizes liabilities based on our estimate of whether, and the extent to which, additional taxes will be due. If payment
of these amounts ultimately proves not to be required, the reversal of the liabilities would result in tax benefits being recognized
in the period when the Company determines the liabilities are no longer necessary. If the Company’s estimate of tax liabilities
proves to be less than the ultimate assessment, a further charge to expense would result.
Income
taxes are discussed in detail in Note 6 of the Notes to Consolidated Financial Statements.
Revenue
Recognition
The
Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed
or determinable, and collection is probable. For the large majority of the Company’s sales, these criteria are met
once product has shipped and title and risk of loss have transferred to the customer. The Company recognizes revenue from
the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardware in accordance
with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software
accounting guidance for standalone sales of software products and sales of software bundled with hardware not essential to the
functionality of the hardware. The Company generally does not offer specified or unspecified upgrade rights to its customers
in connection with software sales.
For
multiple-element arrangements that include tangible products that contain software essential to the tangible product’s functionality
and undelivered software elements that relate to the tangible product’s essential software, the Company allocates revenue
to all deliverables based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy
to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective
evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling
price (ESP). VSOE generally exists only when the Company sells the deliverable separately, on more than a limited basis,
at prices within a relatively narrow range. In addition to the products listed below, the Company has offered certain other
products including mobile applications, in-dash navigation solutions, incremental navigation and/or communication service subscriptions,
aviation subscriptions and extended warranties that involve multiple-element arrangements that are individually immaterial.
The
Company offers PNDs with lifetime map updates (LMUs) bundled in the original purchase price. LMUs enable customers to download
the latest map and point of interest information for the useful life of their PND. In addition, the Company offers PNDs
with traffic service bundled in the original purchase price. The Company has identified multiple deliverables contained
in arrangements involving the sale of PNDs which include the LMU and/or traffic service. The first deliverable is the hardware
along with the software essential to the functionality of the hardware device delivered at the time of sale. The remaining
deliverables are the LMU and/or traffic service. The Company has allocated revenue between these deliverables using the
relative selling price method. Amounts allocated to the delivered hardware and the related essential software are recognized
at the time of sale provided the other conditions for revenue recognition have been met. The revenue and associated cost
of royalties allocated to the LMU and/or the traffic service are deferred and recognized on a straight-line basis over the estimated
life of the products.
The
Company has determined sufficient VSOE does not exist for LMU or traffic, and that third party evidence of selling price is not
available as stand-alone and unbundled unit sales do not occur on more than a limited basis. Therefore, the Company uses
the royalty cost plus a normal margin as the primary indicator to calculate relative selling prices of the LMU and traffic elements.
For
multiple-element software arrangements that do not include a tangible product, the Company allocates revenue to the various elements
based on VSOE. When VSOE cannot be established for undelivered elements, all revenue is deferred until the earlier point at which
all elements of the arrangement are delivered or sufficient VSOE does exist, unless the only undelivered element is post-contract
customer support. If the only undelivered element is post-contract customer support, the entire arrangement consideration is recognized
ratably over the support period. The Company offers navigation software licenses to certain customers, bundled with map updates
to be provided periodically over the support period. The Company has determined sufficient VSOE of similar map updates does not
exist for certain arrangements, and therefore revenue from these transactions is recognized ratably over the contractual map update
period.
The
Company records revenue net of sales tax, trade discounts and customer returns. The Company records estimated reductions
to revenue 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, accrued
for on a percentage of sales basis. If market conditions were to decline, the Company may take actions to increase
customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered.
Deferred
Revenues and Costs
At
December 30, 2017 and December 31, 2016, the Company had deferred revenues totaling $303,521 and $286,971, respectively, and related
deferred costs totaling $122,162 and $103,546, respectively.
The
deferred revenues and costs are recognized over their estimated economic lives, typically one to five years, on a straight-line
basis. In the next five years, the gross margin recognition of deferred revenue and cost for the currently deferred amounts is
estimated to be $91,370, $48,627, $25,340, $11,208, and $4,814, respectively.
Shipping
and Handling Costs
Shipping
and handling costs are included in cost of goods sold in the accompanying consolidated financial statements.
Product
Warranty
The
Company provides for estimated warranty costs at the time of sale. The Company’s standard warranty obligation to retail
partners generally provides for a right of return of any product for a full refund in the event that such product is not merchantable,
is damaged or defective. The Company’s historical experience is that these types of warranty obligations are generally
fulfilled within 5 months from time of sale. The Company’s standard warranty obligation to its end-users provides
for a period of one to two years from date of shipment while certain aviation and auto OEM products have a warranty period of
two years or more from the date of installation. The Company’s estimate of costs to service its warranty obligations
are based on historical experience and expectations of future conditions and are recorded as a liability on the balance sheet.
To the extent the Company experiences increased warranty claim activity or increased costs associated with servicing those claims,
its warranty accrual will increase, resulting in decreased gross profit. The following reconciliation provides an illustration
of changes in the aggregate warranty accrual:
| |
|
Fiscal
Year Ended |
|
| |
|
December
30, |
|
|
December
31, |
|
|
December
26, |
|
| |
|
2017 |
|
|
2016 |
|
|
2015 |
|
| |
|
|
|
|
|
|
|
|
|
| Balance - beginning of period |
|
$ |
37,233 |
|
|
$ |
30,449 |
|
|
$ |
27,609 |
|
| Accrual for products
sold(1) |
|
|
56,360 |
|
|
|
61,578 |
|
|
|
44,620 |
|
| Expenditures |
|
|
(56,766 |
) |
|
|
(54,794 |
) |
|
|
(41,780 |
) |
| Balance - end of
period |
|
$ |
36,827 |
|
|
$ |
37,233 |
|
|
$ |
30,449 |
|
| |
(1) |
Changes in cost
estimates related to pre-existing warranties are not material and aggregated with accruals for new warranty contracts in the
‘accrual for products sold’ line. |
Sales
Programs
The
Company provides certain monthly and quarterly incentives for its dealers and distributors based on various factors including
dealer purchasing volume and growth. Additionally, from time to time, the Company provides rebates to end users on certain products.
Estimated rebates and incentives payable to dealers and distributors are regularly reviewed and recorded as accrued expenses on
a monthly basis. In addition, the Company provides dealers and distributors with product discounts to assist these customers in
clearing older products from their inventories in advance of new product releases. Each discount is tied to a specific product
and can be applied to all customers who have purchased the product, or a special discount may be agreed to on an individual customer
basis. These rebates, incentives, and discounts are recorded as reductions to net sales in the accompanying consolidated statements
of income in the period the Company has sold the product.
Advertising
Costs
The
Company expenses advertising costs as incurred. Advertising expense amounted to approximately $164,693, $177,143, and $167,166
for the years ended December 30, 2017, December 31, 2016, and December 26, 2015, respectively.
Research
and Development
A
majority of the Company’s research and development is performed in the United States. Research and development costs, which
are expensed as incurred, amounted to approximately $511,634, $467,960, and $427,043 for the years ended December 30, 2017, December
31, 2016, and December 26, 2015, respectively.
Customer
Service and Technical Support
Customer
service and technical support costs are included as selling, general and administrative expenses in the accompanying consolidated
statements of income. Customer service and technical support costs include costs associated with performing order processing,
answering customer inquiries by telephone and through websites, e-mail and other electronic means, and providing free technical
support assistance to customers. The technical support is typically provided within one year after the associated revenue is recognized.
The related cost of providing this free support is not material.
Software
Development Costs
The
FASB ASC topic entitled Software requires companies to expense software development costs as they incur them until technological
feasibility has been established, at which time those costs are capitalized until the product is available for general release
to customers. Capitalized software development costs are not significant as the time elapsed from working model to release is
typically short. As required by the Research and Development topic of the FASB ASC, costs incurred to enhance our existing products
or after the general release of the service using the product are expensed in the period they are incurred and included in research
and development costs in the accompanying consolidated statements of income.
Accounting
for Stock-Based Compensation
The
Company currently sponsors four stock-based employee compensation plans. The FASB ASC topic entitled Compensation – Stock
Compensation requires the measurement and recognition of compensation expenses for all share-based payment awards made to
employees and directors, including employee stock options and restricted stock, based on estimated fair values.
Accounting
guidance requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing
model. The value of the portion of the award that is ultimately expected to vest is recognized as stock-based compensation expense
over the requisite service period in the Company’s consolidated financial statements.
As
stock-based compensation expenses recognized in the accompanying consolidated statements of income are based on awards ultimately
expected to vest, they have been reduced for estimated forfeitures. Accounting guidance requires forfeitures to be estimated at
the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures
were estimated based on historical experience and management’s estimates.
In
March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation—Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended
to simplify the accounting for share-based payment awards. The Company adopted ASU 2016-09 on a prospective basis during the quarter
ended April 1, 2017. ASU 2016-09 requires excess tax benefits or deficiencies from stock-based compensation to be recognized in
the income tax provision. We previously recorded these amounts to additional paid-in capital. Additionally, under ASU 2016-09,
excess tax benefits and deficiencies are not estimated in the effective tax rate, rather, are recorded as discrete tax items in
the period they occur. Excess income tax benefits from stock-based compensation arrangements are classified as a cash flow from
operations under ASU 2016-09, rather than as a cash flow from financing activities. The most significant impact of ASU 2016-09
during the fiscal year ending December 30, 2017 was the recognition of income tax expense of $22,620 resulting from stock options
and stock appreciation rights expiring unexercised in the second and fourth quarters.
Stock
compensation plans are discussed in detail in Note 9 of the Notes to Consolidated Financial Statements.
Recently
Issued Accounting Pronouncements
Revenue
from Contracts with Customers
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic
606) (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The FASB has issued several standards
amending or relating to ASU 2014-09 (collectively, the “new revenue standard”). The effective date of ASU 2014-09
is for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. The Company has adopted
the new revenue standard in the first quarter of the Company’s fiscal year ending December 29, 2018 using the full retrospective
method, which will require the Company to restate each prior reporting period presented in future financial statement issuances.
The
Company has evaluated Topic 606, and has assessed existing and historical contracts to identify possible differences in the timing
of revenue recognition under the new revenue standard. During this evaluation, both senior management and the Audit Committee
have been updated as to progress and findings on a frequent basis. Based on our evaluation of the new revenue standard, our recognition
will be consistent with our historical accounting policies except for certain arrangements within the Company’s auto segment.
A
portion of the Company’s auto segment contracts have historically been accounted for under Accounting Standards Codification
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 emphasize the
timing of the Company’s performance, and upon delivery of the navigation device and/or software, the Company has 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 follows:
| |
|
52-Weeks
Ended December 30, 2017 |
|
|
53-Weeks
Ended December 31, 2016 |
|
| |
|
As
reported |
|
|
Restated(1) |
|
|
Impact |
|
|
As
reported |
|
|
Restated(1) |
|
|
Impact |
|
| Net sales |
|
$ |
3,087,004 |
|
|
$ |
3,121,560 |
|
|
$ |
34,556 |
|
|
$ |
3,018,665 |
|
|
$ |
3,045,796 |
|
|
$ |
27,131 |
|
| 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 |
) |
|
|
(7,902 |
) |
|
|
4,759 |
|
|
|
118,856 |
|
|
|
122,890 |
|
|
|
4,034 |
|
| Net income |
|
$ |
694,955 |
|
|
$ |
704,973 |
|
|
$ |
10,018 |
|
|
$ |
510,814 |
|
|
$ |
515,735 |
|
|
$ |
4,921 |
|
| Diluted net income per share |
|
$ |
3.68 |
|
|
$ |
3.74 |
|
|
$ |
0.06 |
|
|
$ |
2.70 |
|
|
$ |
2.72 |
|
|
$ |
0.02 |
|
| |
|
December
30, 2017 |
|
|
December
31, 2016 |
|
| |
|
As
reported |
|
|
Restated(1) |
|
|
Impact |
|
|
As
reported |
|
|
Restated(1) |
|
|
Impact |
|
| Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred
costs |
|
$ |
48,312 |
|
|
$ |
30,525 |
|
|
$ |
(17,787 |
) |
|
$ |
47,395 |
|
|
$ |
34,665 |
|
|
$ |
(12,730 |
) |
| Total
current assets |
|
|
2,363,925 |
|
|
|
2,346,139 |
|
|
|
(17,786 |
) |
|
|
2,263,016 |
|
|
|
2,250,286 |
|
|
|
(12,731 |
) |
| Noncurrent
deferred income tax |
|
|
199,343 |
|
|
|
189,959 |
|
|
|
(9,384 |
) |
|
|
110,293 |
|
|
|
105,668 |
|
|
|
(4,625 |
) |
| Noncurrent
deferred costs |
|
|
73,851 |
|
|
|
33,029 |
|
|
|
(40,822 |
) |
|
|
56,151 |
|
|
|
30,934 |
|
|
|
(25,217 |
) |
| Total
assets |
|
$ |
5,010,260 |
|
|
$ |
4,942,268 |
|
|
$ |
(67,991 |
) |
|
$ |
4,525,133 |
|
|
$ |
4,482,560 |
|
|
$ |
(42,573 |
) |
| Current
liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Deferred
revenue |
|
|
139,681 |
|
|
|
103,140 |
|
|
|
(36,542 |
) |
|
|
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 |
|
|
|
87,061 |
|
|
|
(76,779 |
) |
|
|
140,407 |
|
|
|
91,238 |
|
|
|
(49,169 |
) |
| Retained
earnings |
|
|
2,368,874 |
|
|
|
2,412,423 |
|
|
|
43,549 |
|
|
|
2,056,702 |
|
|
|
2,090,233 |
|
|
|
33,531 |
|
| Accumulated
other comprehensive income |
|
|
56,045 |
|
|
|
56,428 |
|
|
|
382 |
|
|
|
(36,761 |
) |
|
|
(37,024 |
) |
|
|
(263 |
) |
| Total
stockholders' equity |
|
|
3,802,466 |
|
|
|
3,846,397 |
|
|
|
43,931 |
|
|
|
3,418,003 |
|
|
|
3,451,271 |
|
|
|
33,268 |
|
| Total
liabilities and stockholders' equity |
|
$ |
5,010,260 |
|
|
$ |
4,942,267 |
|
|
$ |
(67,992 |
) |
|
$ |
4,525,133 |
|
|
$ |
4,482,561 |
|
|
$ |
(42,572 |
) |
(1)
Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The balances above are restated under ASC
Topic 606.
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.
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. ASU 2016-01 is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company will adopt the new standard
effective in the first quarter of fiscal year 2018, and it is not expected to have a material impact on the Company’s financial
position or results of operations.
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.
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. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2017. The Company will adopt the new standard effective in the first quarter of fiscal year 2018, and it is
not expected to have a material impact on the Company’s financial position of results of operations.
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. ASU 2016-16 is effective for fiscal years, and interim periods
within those years, beginning after December 15, 2017. The Company will adopt the new standard effective in the first quarter
of fiscal year 2018, and it is not expected to have a material impact on the Company’s financial position or results of
operations.
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.
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. ASU 2018-02 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
and expects to early adopt the new standard effective in the first quarter of fiscal year 2018. The Company does not expect the
new standard to have a material impact on the Company’s financial position or results of operations.
|
