Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the section titled "Selected Financial Data" and the consolidated financial statements and related notes thereto included elsewhere in this Annual Report in Form 10-K. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. You should review the "Risk Factors" and "Special Note Regarding Forward-Looking Statements" sections of this Annual Report on Form 10-K for a discussion of important factors that could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a designer, manufacturer and marketer of performance-defining component products used primarily on bikes, side-by-side vehicles, or Side-by-Sides, on-road and off-road vehicles and trucks, all-terrain vehicles or ATVs, snowmobiles, specialty vehicles and applications, motorcycles and commercial trucks. Virtually all of our revenues were from our product sales; miscellaneous sources of revenue such as royalty income and service related repair work and the associated sale of parts represented less than 1% of our sales in each of the years ended January 1, 2021, January 3, 2020 and December 28, 2018.
We have determined that we operate in one reportable segment, which is the manufacturing, sale and service of performance-defining products. Our products fall into the following two categories:
• powered vehicles, including Side-by-Sides, certain on-road vehicles with off-road capabilities, off-road vehicles and trucks, ATVs, snowmobiles, specialty vehicles and applications including military, motorcycles, and commercial trucks;
• specialty sports products, which consist primarily of bike suspension and component products.
In each of the years ended January 1, 2021, January 3, 2020 and December 28, 2018, approximately 59%, 60% and 54%, respectively, of our sales were attributable to sales of products for powered vehicles and approximately 41%, 40% and 46%, respectively, of our sales were attributable to sales of specialty sports products.
Our North American sales totaled $593.3 million, $502.3 million and $388.7 million, or 67%, 67% and 63% of our total sales in fiscal years 2020, 2019 and 2018, respectively. Our international sales totaled $297.3 million, $248.8 million and $230.5 million, or 33%, 33% and 37% of our total sales in fiscal years 2020, 2019 and 2018, respectively. Sales attributable to countries outside the U.S. are based on shipment location. Our international sales, however, do not necessarily reflect the location of the end users of our products as many of our products are incorporated into bikes that are assembled at international locations and then shipped back to the U.S. We estimate, based on our internal projections, that approximately one-third of the end users of our bike products are located outside the U.S.
Opportunities, challenges and risks
We intend to focus on generating sales of our performance-defining products through OEMs and in the aftermarket channel. To do this, we intend to continue to develop and introduce new and innovative products in our current end-markets and we intend to selectively develop products for applications and end-markets in which we do not currently participate. Currently, the majority of our sales are dependent on the demand for performance-defining products.
Our aftermarket distribution network currently consists of more than 5,000 retail dealers and distributors worldwide. To further penetrate the aftermarket channel, we intend to selectively add additional dealers and distributors in certain geographic markets, expand our internal sales force and strategically increase the number of aftermarket specific products and services that we offer for existing vehicle platforms. In addition, we believe international expansion represents a significant opportunity for us and we intend to selectively increase infrastructure investments and focus on identified geographic regions.
As a supplier to OEM customers, we are largely dependent on the success of the business of our OEM customers. Model year changes by our OEM customers may adversely impact our sales or cause our sales to vary from quarter to quarter. Losses in market share or a decline in the overall market of our OEM customers or the discontinuance by our OEM customers of their products that incorporate our products could negatively impact our business and our results of operations.
We have substantially completed the construction of an approximately 336,000 square foot state-of-the-art facility in Hall County, Georgia to diversify our manufacturing platform and provide additional long-term capacity to support growth in our Powered Vehicles Group. The first phase of the Hall County, Georgia project was completed late in the second quarter of 2020 and will be used for manufacturing, warehousing, distribution and office space.
From time to time, we have experienced, and may continue to experience, warranty costs and claims relating to our products. In the ordinary course of business, we reserve for such costs and claims in our financial statements. There is a risk, however, that in the future we will experience higher than expected warranty costs and claims, as well as other related costs.
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We intend to evaluate selective potential acquisition opportunities for performance-defining products and technologies that we believe will help us extend our performance-defining product platform. Any acquisitions that we might make are subject to various risks and uncertainties and could have a negative impact on our results of operations. In addition, we may contractually obligate ourselves to contingent consideration or acquisition related compensation payments in conjunction with such acquisitions, which could have a negative impact on our cash flow and results of operations. See Item 7. " Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Contractual obligations and commitments " for additional information.
Basis of presentation
Composition of sales
Sales from:
• Product sales: consist of sales of performance-defining products and systems to customers worldwide. Sales are measured based on the consideration specified in a contract with a customer. We recognize sales when a performance obligation is satisfied by transferring control of a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, we may also enter into master agreements; and
• Shipping and handling fees: consists of shipping and handling fees billed to customers.
Net of:
• Rebates: consists of incentives we provide to customers based on sales of eligible products; and
• Sales returns allowances: consists of an estimate of our sales returns. This allowance is based upon estimates of the projected returns in future periods based on our experience with returns recorded in previous periods. Sales returns have not been significant to date.
We attribute our past growth in sales predominantly to continued higher demand for on and off-road suspension products, acquisitions, and the success of our current product lines including new products within those lines.
Cost of sales
The cost of sales includes the cost of purchased parts and manufactured products (raw materials consumed, the cost to procure materials, labor costs, including wages, and employee benefits, and factory overhead to produce finished good products), including:
• the costs to inspect and repair products;
• shipping costs associated with inbound freight. These costs are capitalized as part of inventory and included in cost of sales as the inventory is sold;
• royalty expenses, including payments to certain parties for our use of licensed technology incorporated into our products;
• freight expenses incurred for certain shipments to customers;
• warranty costs associated with the repair or replacement of products under warranty; and
• reductions in the cost of inventory to its net realizable value, if required, for estimated excess, obsolescence or impaired balances.
Gross profit/gross margin
Our gross profit equals our sales minus cost of sales. Our gross margin measures our gross profit as a percentage of sales.
Our gross margins fluctuate based on production volumes, product, customer and channel mix and overall supply chain and manufacturing efficiencies. Generally, we earn higher gross margins on our products sold to the aftermarket channel.
Operating expenses
Our operating expenses consist of the following:
• sales and marketing;
• research and development;
• general and administrative;
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• amortization of purchased intangibles; and
• fair value adjustment of contingent consideration and acquisition-related compensation.
Our sales and marketing expenses include costs related to our sales, customer service and marketing personnel, including their wages, employee benefits and related stock-based compensation, and occupancy related expenses. Other significant sales and marketing expenses include race support and sponsorships of events and athletes, advertising and promotions related to trade shows, travel and entertainment, commissions paid to outside sales representatives, promotional materials and products and our sales office costs.
Our research and development expenses consist primarily of salaries and personnel costs, including wages, employee benefits and related stock-based compensation for our engineering, research and development teams, occupancy related expenses, fees for third party consultants, service fees, and expenses for prototype tooling and materials, travel, and supplies. We expense research and development costs as incurred and such costs are included as research and development expenses on our consolidated statements of income.
Our general and administrative expenses include costs related to our executive, finance, legal, information technology, business development, human resources and administrative personnel, including wages, employee benefits and related stock-based compensation expenses. We record professional and contract service expenses, occupancy related expenses associated with corporate locations and equipment, and legal expenses in general and administrative expenses.
Our amortization of purchased intangibles includes amortization over their respective useful lives of our purchased intangible assets, such as customer lists and our core technology. Our intangible assets are evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be fully recoverable. No impairments of intangible assets were identified in the years ended January 1, 2021, January 3, 2020 and December 28, 2018.
Income from operations
We define income from operations as gross profit less our operating expenses. We use income from operations as an indicator of the profitability of our business and our ability to manage costs.
Interest and other expense, net
Interest expense consists of interest charged to us under our credit facility.
Other expense, net, consists of foreign currency transaction gains and losses, gains and losses on the disposal of fixed assets, and other miscellaneous items.
Income taxes
We are subject to income taxes in the U.S. (federal and state) and various other foreign jurisdictions. Our effective tax rate could be affected by numerous factors such as change in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.
For the years ended January 1, 2021, January 3, 2020 and December 28, 2018, we had effective tax rates of 12.2%, 13.0% and 6.1%, respectively.
We have concluded our international restructuring in response to the Tax Cuts Jobs Act (the "TCJA"), and expect that certain other operational changes will be carried out over a number of years. The TCJA significantly changed how the U.S. taxes corporations. As a result of the enactment of the TCJA in December 2017, our unremitted earnings became subject to a transition tax, which we paid with existing foreign tax credits. We therefore no longer consider our unremitted earnings to be permanently reinvested.
As of January 1, 2021, our deferred tax assets included foreign tax credits of approximately $41.2 million, which begin to expire in 2025 unless utilized.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. As of January 1, 2021, we recorded a valuation allowance of $7.2 million, as we anticipate that the TCJA will partially limit our ability to utilize our foreign tax credits. In the future, our effective tax rate could vary as we update our assessment of valuation allowances for our deferred tax assets, including those associated with credit carryforwards. It is reasonably possible that we could record a material adjustment to the valuation allowance in the next 12 months as we assess the progress and outcome of our plans to alter the generation and utilization of foreign tax credits.
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We also have federal and state research credit carryforwards of approximately $1.3 million and $2.3 million, respectively. The federal research credits will begin to expire in 2036 unless utilized; the state research credits do not expire.
Stock-based compensation gives rise to deferred tax assets to the extent of the compensation expense recognized on non-qualified stock options that have not been exercised or expired and restricted stock awards that have not vested. As of January 1, 2021, our deferred tax assets included $1.2 million associated with stock-based compensation expense. The difference between the deferred tax asset and the actual tax deduction for stock-based compensation is recorded as a component of our income tax expense. Our effective tax rate will vary based on such differences.
We are subject to examination of our income tax returns by the U.S. Internal Revenue Service ("IRS") and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our income tax liabilities and expense. Should actual events or results differ from our current expectations, charges or credits to our income tax expense may become necessary. Any such adjustments could have a significant impact on our effective tax rate.
In 2018, we received a no change letter from the IRS related to the audit of our 2015 federal tax return. Additionally, we entered into a closing agreement with the IRS that resolved the uncertainty about the deductibility of amortization and depreciation arising from the Compass Group Diversified Holdings LLC's acquisition of us in 2008 (the "Compass Acquisition") for all open tax years. The favorable conclusion resulted in a decrease in the unrecognized tax benefits of $6.2 million, of which $5.6 million favorably impacted the effective tax rate. Including the reversal of the amounts presented as net of deferred tax assets and accrued interest and penalties, the favorable conclusion resulted in a benefit of $9.8 million to the provision for income tax for the year ended December 28, 2018. The deductibility of acquisition-related amortization and depreciation for state tax purposes remains uncertain.
Results of operations
The table below summarizes our results of operations for the fiscal years ended January 1, 2021, January 3, 2020, and December 28, 2018:
For the fiscal years ended
January 1 January 3 December 28
(in thousands) 2021 2020 2018
Sales $ 890,554 $ 751,020 $ 619,225
Cost of sales 601,007 508,285 413,729
Gross profit 289,547 242,735 205,496
Operating expenses:
Sales and marketing 52,214 42,794 37,296
Research and development 34,292 31,789 25,847
General and administrative 71,309 48,999 41,756
Amortization of purchased intangibles 17,583 6,344 6,065
Total operating expenses 175,398 129,926 110,964
Income from operations 114,149 112,809 94,532
Interest and other expense, net:
Interest expense 9,294 3,173 3,059
Other expense 325 1,067 583
Total interest and other expense, net 9,619 4,240 3,642
Income before income taxes 104,530 108,569 90,890
Provision for income taxes 12,784 14,099 5,523
Net income 91,746 94,470 85,367
Less: net income attributable to non-controlling interest 1,072 1,437 1,327
Net income attributable to FOX stockholders $ 90,674 $ 93,033 $ 84,040
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The following table sets forth statement of income data as a percentage of sales for the years indicated:
For the fiscal years ended
January 1 January 3 December 28
2021 2020 2018
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 67.5 67.7 66.8
Gross profit 32.5 32.3 33.2
Operating expenses:
Sales and marketing 5.9 5.7 6.0
Research and development 3.9 4.2 4.2
General and administrative 8.0 6.5 6.7
Amortization of purchased intangibles 2.0 0.8 1.0
Total operating expenses 19.7 17.3 17.9
Income from operations 12.8 15.0 15.3
Interest and other expense, net:
Interest expense 1.0 0.4 0.5
Other expense — 0.1 0.1
Interest and other expense, net 1.1 0.6 0.6
Income before income taxes 11.7 14.5 14.7
Provision for income taxes 1.4 1.9 0.9
Net income 10.3 12.6 13.8
Less: net income attributable to non-controlling interest 0.1 0.2 0.2
Net income attributable to FOX stockholders 10.2 % 12.4 % 13.6 %
*Percentages may not foot due to rounding.
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Fiscal year ended January 1, 2021 compared to fiscal year ended January 3, 2020
Sales
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Sales $ 890.6 $ 751.0 $ 139.6 18.6 %
Sales for the year ended January 1, 2021 increased approximately $139.6 million, or 18.6%, compared to the year ended January 3, 2020. The sales increase reflects a 22.4% increase in Specialty Sports products as well as a 16.1% growth in Powered Vehicle products for the year ended January 1, 2021 compared to the prior year. The increase in Specialty Sports product sales reflects higher demand in both OEM and aftermarket channels. The increase in sales of Powered Vehicle product sales was primarily due to the inclusion of SCA's results.
Cost of sales
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Cost of sales $ 601.0 $ 508.3 $ 92.7 18.2 %
Cost of sales for the year ended January 1, 2021 increased approximately $92.7 million, or 18.2%, compared to the year ended January 3, 2020. The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below.
For the year ended January 1, 2021, our gross margin was 32.5% compared to 32.3% for the year ended January 3, 2020. The increase in gross margin was primarily due to the impact of the SCA acquisition and a favorable change in product and channel mix partially offset by incremental cost due to the COVID-19 pandemic as well as duplicate costs incurred as we transition our North American manufacturing operations.
Operating expenses
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Operating expenses:
Sales and marketing $ 52.2 $ 42.8 $ 9.4 22.0 %
Research and development 34.3 31.8 2.5 7.9 %
General and administrative 71.3 49.0 22.3 45.5 %
Amortization of purchased intangibles 17.6 6.3 11.3 179.4 %
Total operating expenses $ 175.4 $ 129.9 $ 45.5 35.0 %
Total operating expenses for the year ended January 1, 2021 increased approximately $45.5 million, or 35.0%, over the comparable period in 2019. When expressed as a percentage of sales, operating expenses increased to 19.7% of sales for the year ended January 1, 2021 compared to 17.3% of sales in 2019.
Within operating expenses, our sales and marketing expense increased by approximately $9.4 million primarily due to costs related to SCA of $8.5 million. Additionally, we incurred higher personnel and commission expenses of $2.8 million, which were partially offset by reduced spending on trade shows and race events. Research and development expenses increased approximately $2.5 million primarily due to headcount and facility-related expenses, partially offset by reductions in supplies, equipment, and other various expenses across our organization. General and administrative expenses increased approximately $22.3 million due to acquisition-related costs of approximately $14.1 million and the inclusion of SCA operating costs of $5.9 million, and higher headcount costs including incentive compensation, partially offset by lower patent-related legal costs.
Amortization of purchased intangible assets for the year ended January 1, 2021 increased by approximately $11.3 million as compared to the year ended January 3, 2020, due to the amortization of SCA's intangible assets.
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Income from operations
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Income from operations $ 114.1 $ 112.8 $ 1.3 1.2 %
As a result of the factors discussed above, income from operations for the year ended January 1, 2021 increased approximately $1.3 million, or 1.2%, compared to income from operations in the same period in 2019.
Interest and other expense, net
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Interest and other expense, net:
Interest expense $ 9.3 $ 3.2 $ 6.1 190.6 %
Other expense, net $ 0.3 $ 1.0 (0.7) (70.0) %
Interest and other expense, net $ 9.6 $ 4.2 $ 5.4 128.6 %
Interest and other expense, net for the year ended January 1, 2021 increased by approximately $5.4 million to $9.6 million compared to $4.2 million for the year ended January 3, 2020. The increase in interest and other expense, net is primarily due to interest expense on additional borrowings in connection with our acquisition of SCA.
Income taxes
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Provision for income taxes $ 12.8 $ 14.1 $ (1.3) (9.2) %
Income tax expense for the year ended January 1, 2021 decreased by approximately $1.3 million to $12.8 million compared to income tax expense of $14.1 million in the same period in 2019. The decrease in expense resulted from the decrease in pre-tax profit, as well as from the benefits of excess deductions on stock-based compensation and the benefit of a lower tax rate on U.S. foreign derived earnings.
The effective tax rates were 12.2% and 13.0% for the years ended January 1, 2021 and January 3, 2020, respectively.
For the year ended January 1, 2021, the difference between our effective tax rate and the 21% federal statutory rate resulted from the decrease in pre-tax profit, as well as, the benefit of excess deductions on stock-based compensation and the benefit of a lower tax rate on U.S. foreign derived earnings .
For the year ended January 3, 2020, the difference between our effective tax rate and the 21% federal statutory rate resulted primarily from the benefit of excess deductions on stock-based compensation, and the benefit of a lower tax rate on U.S. foreign derived earnings, partially offset by non-deductible executive compensation and state taxes.
Net income
For the fiscal years ended
(in millions) 2020 2019 Change ($) Change (%)
Net income $ 91.7 $ 94.5 $ (2.8) (3.0) %
As a result of the factors described above, our net income decreased $2.8 million, or 3.0%, to $91.7 million in the fiscal year ended January 1, 2021 from $94.5 million for the same period in 2019.
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Fiscal year ended January 3, 2020 compared to fiscal year ended December 28, 2018
Sales
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Sales $ 751.0 $ 619.2 $ 131.8 21.3 %
Sales for the fiscal year ended January 3, 2020 increased approximately $131.8 million, or 21.3%, compared to the year ended December 28, 2018. The sales increase reflects 33.8% growth in Powered Vehicle products as well as a 6.3% increase in Specialty Sports products for the fiscal year ended January 3, 2020 compared to the prior fiscal year. The increase in sales of Powered Vehicle product sales was primarily due to the continued success of our product lineup, particularly in the OEM channel, as well as the inclusion of Ridetech's results. The increase in Specialty Sports product sales reflects new product introductions and strong sell through with certain higher growth OEMs.
Cost of sales
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Cost of sales $ 508.3 $ 413.7 $ 94.6 22.9 %
Cost of sales for the fiscal year ended January 3, 2020 increased approximately $94.6 million, or 22.9%, compared to the year ended December 28, 2018. The increase in cost of sales was driven primarily by an increase in product sales, as well as certain business factors affecting gross margin, which are discussed below.
For the year ended January 3, 2020, our gross margin was 32.3% compared to 33.2% for the fiscal year ended December 28, 2018. The decrease in our gross profit margin was primarily due to a shift in customer and product mix as the Company's larger North American OEMs represented a higher portion of sales. Additionally, we incurred manufacturing and supply chain inefficiencies associated with a higher than anticipated increase in customer demand.
Operating expenses
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Operating expenses:
Sales and marketing $ 42.8 $ 37.3 $ 5.5 14.7 %
Research and development 31.8 25.8 6.0 23.3 %
General and administrative 49.0 41.8 7.2 17.2 %
Amortization of purchased intangibles 6.3 6.1 0.2 3.3 %
Total operating expenses $ 129.9 $ 111.0 $ 18.9 17.0 %
Total operating expenses for the fiscal year ended January 3, 2020 increased approximately $18.9 million, or 17.0%, over the comparable period in 2018. When expressed as a percentage of sales, operating expenses decreased to 17.3% of sales for the fiscal year ended January 3, 2020 compared to 17.9% of sales in 2018.
Within operating expenses, our sales and marketing expense increased by approximately $5.5 million primarily due to wages and related expenses of $2.2 million, costs related to our recently acquired Ridetech subsidiary of $1.7 million, and various other promotional expenses to expand our marketing team and continue to grow our brand. Research and development expenses increased approximately $6.0 million primarily due to headcount investments of $4.6 million as we continue to pursue product innovation, facilities related costs and cost associated with Ridetech. General and administrative expenses increased approximately $7.2 million due to payroll related costs of $4.0 million, facility and depreciation expense of $2.4 million, costs associated with Ridetech of $0.6 million and various other items, partially offset by a decrease of $1.3 million in litigation expenses.
Amortization of purchased intangible assets for the fiscal year ended January 3, 2020 increased by approximately $0.2 million as compared to the fiscal year ended December 28, 2018, due to the amortization of Ridetech's intangible assets.
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Income from operations
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Income from operations $ 112.8 $ 94.5 $ 18.3 19.4 %
As a result of the factors discussed above, income from operations for the fiscal year ended January 3, 2020 increased approximately $18.3 million, or 19.4%, compared to income from operations in the same period in 2018.
Interest and other expense, net
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Interest and other expense, net:
Interest expense $ 3.2 $ 3.1 $ 0.1 3.2 %
Other expense, net 1.0 0.5 0.5 100.0 %
Interest and other expense, net $ 4.2 $ 3.6 $ 0.6 16.7 %
Interest and other expense, net for the fiscal year ended January 3, 2020 increased by approximately $0.6 million to $4.2 million compared to $3.6 million for the fiscal year ended December 28, 2018. The increase in interest and other expense, net is primarily due to a $0.5 million increase in foreign exchange losses in the fiscal year ended January 3, 2020.
Income taxes
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Provision for income taxes $ 14.1 $ 5.5 $ 8.6 156.4 %
Income tax expense for the fiscal year ended January 3, 2020 increased by approximately $8.6 million to $14.1 million compared to income tax expense of $5.5 million in the same period in 2018. The increase in expense resulted primarily from the non-recurring Compass Acquisition uncertain tax position which was reflected in 2018, partially offset by the benefit of U.S. foreign derived earnings and the benefit of excess deductions on stock-based compensation.
The effective tax rates were 13.0% and 6.1% for the fiscal years ended January 3, 2020 and December 28, 2018, respectively.
For the fiscal year ended January 3, 2020, the difference between our effective tax rate and the 21% federal statutory rate resulted primarily from the benefit of excess deductions on stock-based compensation, the benefit of a lower tax rate on U.S. foreign derived earnings, partially offset by non-deductible executive compensation and state taxes.
For the fiscal year ended December 28, 2018, the difference between our effective tax rate and the 21% federal statutory rate resulted primarily from the favorable result of the uncertain tax position related to the Compass Acquisition, the benefit of excess deductions on stock-based compensation, the benefit of a lower tax rate on U.S. foreign derived earnings, partially offset by non-deductible executive compensation and state taxes.
Net income
For the fiscal years ended
(in millions) 2019 2018 Change ($) Change (%)
Net income $ 94.5 $ 85.4 $ 9.1 10.7 %
As a result of the factors described above, our net income increased $9.1 million, or 10.7%, to $94.5 million in the fiscal year ended January 3, 2020 from $85.4 million for the same period in 2018.
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Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions and acquisition-related compensation, debt repayments and share repurchases. We have generally financed our historical needs with operating cash flows and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made by us in acquired businesses, our plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of January 1, 2021, we held $22.4 million of our $245.8 million of cash and cash equivalents in accounts of our subsidiaries outside of the U.S., which we may repatriate. We manage our foreign cash, intercompany payables and intercompany debt to provide a foreign currency hedge against U.S. dollar-denominated trade receivable balances held by our Taiwan location.
A summary of our operating, investing and financing activities are shown in the following table:
For the years ended
January 1 January 3 December 28
(in thousands) 2021 2020 2018
Net cash provided by operating activities $ 82,715 $ 74,830 $ 65,392
Net cash used in investing activities (388,525) (60,330) (30,203)
Net cash provided by (used in) financing activities 506,722 859 (43,431)
Effect of exchange rate changes on cash and cash equivalents 1,116 419 253
Increase (decrease) in cash and cash equivalents $ 202,028 $ 15,778 $ (7,989)
We expect that cash on hand, cash flow from operations and availability under our credit facility will be sufficient to fund our operations during the next 12 months from the date of this Annual Report on Form 10-K.
Operating activities
Cash provided by operating activities primarily consists of net income, adjusted for certain non-cash items, primarily depreciation and amortization, stock-based compensation, and deferred income taxes, offset by net cash invested in working capital.
In the fiscal year ended January 1, 2021, cash provided by operating activities was $82.7 million and consisted of net income of $91.7 million plus non-cash items and other adjustments totaling $30.0 million less changes in operating assets and liabilities totaling $39.0 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $33.9 million, stock-based compensation of $8.6 million, and amortization of loan fees of $1.5 million, offset by a $14.1 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in prepaids and other current assets of $66.4 million and accounts receivable of $18.8 million, partially offset by decreases in accounts payable of $25.9 million, accrued expenses of $11.2 million and inventory of $7.9 million. The increase in prepaids and other current assets is primarily due to deposits on chassis and acquisition-related compensation payments held in escrow, both related to our acquired SCA subsidiary. The changes in inventory, accounts receivable, accounts payable and accrued expenses reflect business growth as well as timing of vendor payments.
In the fiscal year ended January 3, 2020, cash provided by operating activities was $74.8 million and consisted of net income of $94.5 million plus non-cash items and other adjustments totaling $14.5 million less changes in operating assets and liabilities totaling $34.2 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $17.7 million, stock-based compensation of $6.9 million, and loss on the extinguishment of debt of $0.5 million, offset by a $10.6 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of $17.0 million, and accounts receivable of $12.1 million, decreases in income taxes of $3.6 million and accrued expenses of $2.3 million, partially offset by a decrease in prepaids and other assets of $1.7 million. The changes in inventory, accounts receivable, accrued expenses and prepaids and other assets are primarily attributable to business growth and the impact of the Ridetech acquisition. The decrease in income taxes is primarily due to the timing of estimated tax payments and refunds.
In the fiscal year ended December 28, 2018, cash provided by operating activities was $65.4 million and consisted of net income of $85.4 million plus non-cash items and other adjustments totaling $2.8 million less changes in operating assets and liabilities totaling $22.7 million. Non-cash items and other adjustments consisted primarily of depreciation and amortization of $14.7 million, and stock-based compensation of $7.3 million, offset by a $19.3 million change in deferred taxes. Cash invested in operating assets and liabilities is primarily the result of increases in inventory of $23.0 million, and accounts receivable of $19.0 million, partially offset by increases in accounts payable of $15.2 million, and accrued expenses of $4.2 million. The increases in inventory, accounts receivable, accounts payable and accrued expenses reflect the growth of our business, changes in customer mix and timing, and the expansion of our manufacturing facilities.
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Investing activities
Cash used in investing activities primarily relates to strategic acquisitions of businesses and other assets, and investments in our manufacturing and general infrastructure through the acquisition of property and equipment.
In the fiscal year ended January 1, 2021, cash used in investing activities was $388.5 million which primarily consisted of $331.5 million of cash consideration for our acquisition of SCA and $56.7 million in property and equipment additions.
In the fiscal year ended January 3, 2020, cash used in investing activities was $60.3 million which primarily consisted of $53.5 million in property and equipment additions and $6.8 million of cash consideration for our acquisition of Ridetech.
In the fiscal year ended December 28, 2018, cash used in investing activities was $30.2 million which consisted entirely of property and equipment additions.
Financing activities
Cash provided by or used in financing activities primarily relates to changes in our capital structure, including the various forms of debt and equity instruments used to finance our business.
In the fiscal year ended January 1, 2021, net cash provided by financing activities was $506.7 million, which consisted primarily of $392.4 million in proceeds, net of issuance costs, from our First Amended and Restated Credit Facility, which was amended and restated in connection with our acquisition of SCA, partially offset by net payments of $68.0 million on our line of credit and payments on our term debt of $5.0 million. In addition, we received $198.2 million from our June 2020 issuance of common stock. These inflows were partially offset by $4.3 million to repurchase shares of our common stock as part of our stock-based compensation program and $6.6 million in installment payments related to the purchase of the Tuscany non-controlling interest. Refer to Note 1 2 - Commitments and Contingencies for additional details.
In the fiscal year ended January 3, 2020, net cash provided by financing activities was $0.9 million, which consisted primarily of $7.7 million in net proceeds from our credit facility offset by $6.8 million in payments to repurchase shares to cover tax withholding related to the vesting of restricted stock awards, net of proceeds from the exercise of stock options.
In the fiscal year ended December 28, 2018, net cash used in financing activities was $43.4 million, which consisted primarily of $39.3 million in net payments on our credit facility and $4.1 million in payments to repurchase shares to cover tax withholding related to the vesting of restricted stock awards, net of proceeds from the exercise of stock options.
Former Second Amended and Restated Credit Facility
In August 2013, the Company entered into a credit facility with SunTrust Bank, N.A. and other named lenders, which was periodically amended and restated (the "Second Amended and Restated Credit Facility"). The Company paid off the Second Amended and Restated Credit Facility in June 2019 upon entering into the new credit facility with Bank of America, N.A. ("Bank of America").
First Amended and Restated Credit Facility
In June 2019, the Company entered into a credit facility with Bank of America and other named lenders, which was amended and restated on March 11, 2020 and June 19, 2020 (as most recently amended and restated as the "First Amended and Restated Credit Facility"). The First Amended and Restated Credit Facility, which matures on March 11, 2025, provides a senior secured revolving line of credit with a borrowing capacity of $250.0 million and a term loan of $400.0 million. The term loan is subject to quarterly amortization payments.
The Company paid $7.6 million in debt issuance costs, of which $6.5 million were allocated to the term debt and $1.2 million were allocated to the line of credit. Additionally, the Company had $0.4 million of remaining unamortized debt issuance costs. The Company expensed $0.3 million of the remaining unamortized debt issuance costs, which are included in interest and other expense, net on the condensed consolidated statements of income for the fiscal year ended January 1, 2021 and the remaining $0.1 million were allocated to the line of credit. All loan fees allocated to the term debt will be amortized using the interest method and all loan fees allocated to the line of credit will be amortized on a straight-line basis over the term of the First Amended and Restated Credit Facility.
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The First Amended and Restated Credit Facility provides for interest at a rate either based on the London Interbank Offered Rate, or LIBOR, plus a margin ranging from 1.00% to 2.25%, with a floor rate of 0.50%, or based on the base rate offered by Bank of America plus a margin ranging from 0.00% to 1.25%. At January 1, 2021, the one-month LIBOR and prime rates were 0.14% and 3.25%, respectively. At January 1, 2021, our weighted-average interest rate on outstanding borrowing was 1.62%. The First Amended and Restated Credit Facility is secured by substantially all of the Company’s assets, restricts the Company's ability to make certain payments and engage in certain transactions, and requires that the Company satisfy customary financial ratios. The Company was in compliance with the covenants as of January 1, 2021.
Contractual obligations and commitments
As of January 1, 2021, we had the following contractual obligations (in thousands):
Payments due by period Total Less than 1 year 1-3 years 4-5 years More than 5 years
Long-term borrowings $ 395,000 $ 12,500 $ 37,500 $ 345,000 $ —
Operating lease obligations 27,887 7,482 11,364 6,312 2,729
Purchase obligations and other 3,991 3,991 — — —
Total $ 426,878 $ 23,973 $ 48,864 $ 351,312 $ 2,729
As of January 1, 2021, we had a liability of approximately $1.1 million associated with uncertain tax positions, which is classified as a current liability in our consolidated balance sheet because it is reasonably possible that certain federal, foreign, and state tax matters could be concluded in the next 12 months. However, our liability for uncertain tax positions has been excluded from our summary of contractual obligations as we cannot make a reliable estimate of the period of cash settlement with the respective taxing authorities, nor the amount of the final cash settlement. See Note 1 5 - Income Taxes of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
Seasonality
Certain portions of our business are seasonal; we believe this seasonality is due to the delivery of new products. As we have diversified our product offerings and our product launch cycles, seasonal fluctuations are becoming less material.
Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements.
Inflation
Historically, inflation has not had a material effect on our results of operations. However, significant increases in inflation, particularly those related to wages and increases in the cost of raw materials could have an adverse impact on our business, financial condition and results of operations.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates, judgments, and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and related disclosures. We evaluate our estimates, judgments, and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
We believe that the assumptions, judgments, and estimates associated with the following have the greatest potential impact on, and are critical to the understanding of, our results of operations: revenue recognition, provision for doubtful accounts receivable, inventory, goodwill and intangible assets, earn-out arrangements, warranty, income taxes and stock-based compensation. For further information see Note 1 - Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K.
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Critical Accounting Policies
Revenue recognition
Revenue is measured based on the consideration specified in a contract with a customer. The Company recognizes revenue when it satisfies a performance obligation by transferring control over a product to a customer, generally at the time of shipment. Contracts are generally in the form of purchase orders and are governed by standard terms and conditions. For larger OEMs, the Company may also enter into master agreements.
Provisions for discounts, rebates, sales incentives, returns, and other adjustments are generally provided for in the period the related sales are recorded, based on management’s assessment of historical trends and projection of future results. Certain pricing provisions that provide the customer with future discounts are considered a material right. Such material rights result in the deferral of revenue that are recognized when the rights are exercised by the customer. Measuring the material rights requires judgments including forecasts of future sales and product mix. Effective December 30, 2017, we adopted ASC 606, Revenue from Contracts with Customers . Refer to Note 1 - Description of the Business, Basis of Presentation and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for additional details of this new accounting pronouncement.
Allowance for doubtful accounts
We record a provision for doubtful accounts deemed not collectible using the aging method. The provision is based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. If circumstances change, such as higher-than-expected defaults or an unexpected material adverse change in a major customer’s ability to meet its financial obligations, we estimate if the recoverability of the amounts due could be reduced by a material amount.
Inventories
Inventories are stated at the lower of actual cost (or standard cost which generally approximates actual costs on a first-in first-out basis) or net realizable value. Cost includes raw materials, as well as direct labor and manufacturing overhead for products we manufacture. Net realizable value is based on current replacement cost for raw materials and on a net realizable value for finished goods. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess, obsolete or impaired balances.
We regularly monitor inventory quantities on hand and on order and record write-downs for excess and obsolete inventories based on our estimate of the demand for our products, potential obsolescence of technology, product life cycles, and when pricing trends or forecasts indicate that the carrying value of inventory exceeds our estimated selling price. These factors are affected by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on our gross margin. If inventory is written down, a new cost basis will be established that cannot be increased in future periods.
Goodwill, intangible assets and long-lived assets
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net assets of businesses acquired. On an annual basis, the Company makes a qualitative assessment to determine if it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill. If the Company determines that the fair value of the reporting unit is less than its carrying amount, it will perform a quantitative analysis; otherwise, no further evaluation is necessary.
For the quantitative impairment test, the Company compares the fair value of the reporting unit to its carrying value, including goodwill. The Company determines the fair value of the reporting unit based on a weighting of income and market approaches. If the fair value of the reporting unit exceeds the carrying value of the net assets assigned to that unit, goodwill is not impaired and no further testing is performed. If the carrying value of the net assets assigned to the reporting unit exceeds the fair value of the reporting unit, then the Company will recognize a loss equal to the excess, limited to the total amount of goodwill allocated to that reporting unit. Impairments, if any, are charged directly to earnings. We completed our most recent annual impairment test in the third quarter of 2020 at which time we had a single reporting unit for purposes of assessing goodwill impairment. No impairment charges have been incurred to date.
Indefinite-lived intangible assets
Certain trademarks and trade names are considered to be indefinite life intangibles, and are not amortized but are subject to testing for impairment annually.
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Finite-lived intangible assets
We assess the recoverability of identifiable finite-lived intangible assets whenever events or changes in circumstances indicate that an asset or asset group’s carrying amount may be impaired. Impairment of certain finite-lived intangible assets, particularly customer relationships, certain trade names and core technology, is measured by comparing the carrying amount of the asset group to which the assets are assigned to the sum of the undiscounted estimated future cash flows the asset group is expected to generate. If the asset or asset group is considered to be impaired, the amount of such impairment would be measured by the difference between the carrying amount of the asset and its fair value.
Acquisition of certain identifiable definite-lived and indefinite-lived assets
In conjunction with an acquisition of a business, the Company records identifiable definite-lived and indefinite-lived intangible assets acquired at their respective fair values as of the date of acquisition. The estimates used in assessing the fair value for the assets acquired include projected future cash flows, associated discount rates used to calculate present value, asset life cycles, customer retention rates and royalty rates. The fair value calculated for indefinite-lived intangible assets such as certain tradenames, in addition to intangible assets that are definite-lived such as customer relationships and other technology-based assets may change during the finalization of the purchase price allocation, due to the significant estimates used in determining their fair value. As a result, the Company may make adjustments to the provisional amounts recorded for certain items as part of the purchase price allocation subsequent to the acquisition, not to exceed one year after the acquisition date, until the purchase accounting allocation is finalized.
Warranty
Unless otherwise required by law, the Company generally offers limited warranties on its products for one to two years. We accrue estimated costs related to warranty activities as a component of cost of sales upon product shipment or when information becomes available indicating that an adjustment to the warranty reserves is appropriate. Management estimates are based upon historical and projected product failure rates and historical costs incurred in correcting product failures. The warranty reserve is assessed from time to time for adequacy and adjusted as necessary for specifically identified warranty exposures. Actual warranty expenses are charged against our estimated warranty liability when incurred. Factors that affect our liability include the number of units, historical and anticipated rates of warranty claims, and the cost per claim. An increase in warranty claims or the related costs associated with satisfying these warranty obligations could increase our cost of sales and negatively affect our operating results.
Income taxes
We are subject to income taxes in the U.S. (federal and state) and foreign jurisdictions. We compute our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are measured using the currently enacted tax rates that are expected to apply to taxable income for the years in which those tax assets and liabilities are expected to be realized or settled. The income tax effects of these differences are classified as long-term deferred tax assets and liabilities in our consolidated balance sheets.
Significant judgments are required in order to determine the realizability of these deferred tax assets. In assessing the need for a valuation allowance, we evaluate all significant available positive and negative evidence, including but not limited to, historical operating results, forecasted earnings, estimates of future taxable income of a character necessary to realize the deferred asset, relative proportions of revenue and pre-tax income in the various domestic and jurisdictions in which we operate, and the existence of prudent and feasible tax planning strategies. Changes in the expectations regarding the realization of deferred tax assets could materially impact income tax expense in future periods.
Additionally, our judgments, assumptions, and estimates relative to the provision for income taxes take into account enacted tax laws, regulations, administrative practices, interpretations in various jurisdictions and possible outcomes of current and future audits conducted by tax authorities. Our effective tax rates could be affected by numerous factors, such as changes in our business operations, acquisitions, investments, entry into new businesses and geographies, intercompany transactions, the relative amount of our foreign earnings, losses incurred in jurisdictions for which we are not able to realize related tax benefits, changes in our deferred tax assets and liabilities and their valuation, changes in the laws, regulations, administrative practices, principles, and interpretations related to tax, including changes to the global tax framework and other laws and accounting rules in various jurisdictions.
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We utilize a two-step approach to recognizing and measuring uncertain income tax positions. The first step is to determine if the weight of available evidence indicates that it is more likely than not that the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. We consider many factors when evaluating tax positions such as the closing of a tax audit, the refinement of estimates, and the expiration of a statute of limitations that may require periodic adjustments that impact our tax provision in our consolidated statements of income. Interest and penalties associated with income taxes are recorded as income tax expense.
The TCJA significantly changed how the U.S. taxes corporations. The TCJA requires complex computations to be performed that were not previously required by U.S. tax law, significant judgments to be made in interpretation of the provisions of the TCJA, significant estimates in calculations, and the preparation and analysis of information not previously relevant or regularly produced. The U.S. Treasury Department, the IRS, and other standard-setting bodies will continue to interpret or issue guidance on how provisions of the TCJA will be applied or otherwise administered. As future guidance is issued, we may adjust amounts that we have previously recorded that may materially impact our provision for income taxes in the period in which the adjustments are made.
Stock-based compensation
The Company measures stock-based compensation for all stock-based awards, including stock options and restricted stock units ("RSUs"), based on their estimated fair values on the date of the grant and recognizes the stock-based compensation cost for time-vested awards on a straight-line basis over the requisite service period. For performance-based RSUs, the number of shares ultimately expected to vest is estimated at each reporting date based on management’s expectations regarding the relevant performance criteria. To the extent shares are expected to vest, the stock-based compensation cost is recognized on a straight-line basis over the requisite service period. The fair value of each stock option granted is estimated using the Black-Scholes option-pricing model. The Company does not estimate forfeitures in recognizing stock-based compensation expense.
The determination of the grant date fair value of options using an option-pricing model is affected by our common stock fair value as well as assumptions including our expected stock price volatility over the expected term of the options, stock option exercise and cancellation behaviors, risk-free interest rates and expected dividends.
Prior to our IPO in August of 2013, our Board of Directors considered numerous objective and subjective factors to determine the fair market value of our common stock at each meeting at which stock options were granted and approved.
Stock-based compensation expenses are classified in the statements of income based on the department to which the related employee reports. Our stock-based awards subsequent to our IPO have been comprised principally of restricted stock unit awards.
Fair value measurement and financial instruments
ASC 820, Fair Value Measurements and Disclosures , requires the valuation of assets and liabilities required or permitted to be either recorded or disclosed at fair value based on hierarchy of available inputs as follows:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices for similar assets and liabilities in active markets, quoted prices for identical assets and liabilities in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
We apply fair value accounting for all financial assets and liabilities and non-financial assets and liabilities that are recognized or disclosed at fair value in the financial statements on a recurring basis. We define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities, which are required to be recorded at fair value, we consider the principal or most advantageous market in which we would transact and the market-based risk measurements or assumptions that market participants would use in pricing the asset or liability, such as risks inherent in valuation techniques, transfer restrictions and credit risk.
We used Level 2 inputs to determine the fair value of our First Amended and Restated Credit Facility. The Company believes the carrying amount of its First Amended and Restated Credit Facility approximates the fair value at January 1, 2021 because, while subject to a minimum LIBOR floor rate, the interest rate approximates current market rates of debt with similar terms and comparable credit risk.
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On August 17, 2020 we entered into an interest rate swap agreement to mitigate the cash flow risk associated with changes in interest rates on our variable rate debt. Refer to N ote 1 1 - Derivatives and Hedging for additional details of the agreement. In accordance with ASC 815, Derivatives and Hedging Interest rate swap contract is recognized as an asset or liability on the consolidated balance sheets and is measured at fair value. The fair value was calculated utilizing Level 2 inputs.
On July 22, 2020, we, pursuant to a stock purchase agreement with Flagship, Inc., dated as of the same date, purchased the remaining 20% interest of FF US Holding Corp. for $24,975 payable in a combination of stock and cash. Refer to Note 1 2 - Commitments and Contingencies for additional details of this agreement. Prior to the consummation of the stock purchase, the non-controlling interest was measured at fair value using Level 3 inputs.
Recent Accounting Pronouncements
In May 2014, the FASB and International Accounting Standards Board issued their converged standard on revenue recognition, ASU 2014-09, updated December 2016 with the release of ASU 2016-20. This standard outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity recognizes revenue to depict the transfer of promised goods and services in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods and services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2018 using the modified retrospective implementation method. The Company applied the guidance to all open contracts at the date of initial application. Additionally, the Company used the practical expedient to omit the disclosure of remaining performance obligations for contracts with an original expected duration of one year or less. The primary impact of adopting the standard resulted from certain pricing provisions within contracts that provide the customer with a material right. Under the new standard, revenue attributed to such pricing provisions is deferred and recognized when the right is exercised by the customer. The Company recorded a cumulative effect adjustment of $0.4 million gross and $0.3 million net of taxes to the fiscal year 2018 opening balance of retained earnings to reflect the cumulative effect of the adoption of the standard.
In February 2016, the FASB issued ASU 2016-02, Leases, which supersedes the existing guidance for lease accounting. To meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases, this ASU requires lessees to recognize most leases on the balance sheet as right-of-use assets and lease liabilities.
The Company adopted this guidance as of the beginning of the first quarter of fiscal year 2019, with a cumulative effect adjustment to the opening balance of retained earnings at December 28, 2018 with no restatement of comparative periods’ financial information ("current-period adjustment method"). Additionally, the Company adopted this guidance using practical expedients with respect to the assessment of embedded leases, lease classification, and initial indirect costs for expired and existing leases. The Company also elected the practical expedient related to treating lease and non-lease components as a single lease component for all of its leases and elected a policy exclusion permitting leases with an original lease term of less than one year to be excluded from the right-of-use assets and lease liabilities. The Company did not use the hindsight practical expedient to adopt this guidance. The Company recorded a cumulative effect adjustment of $13.6 million to operating lease right-of-use assets, $13.9 million to operating lease liabilities, and $0.3 million gross ($0.2 million net of taxes) to the fiscal year 2019 opening balance of the Company's retained earnings to reflect the cumulative effect of the adoption of the standard. This standard did not have a material impact on our consolidated income statements.
In June 2016, the FASB issue ASU 2016-13, Financial Instruments: Credit Losses, which adds an impairment model that is based on expected losses rather than incurred losses. Under this standard, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The Company adopted ASU 2016-13 effective in the first quarter of fiscal year 2020 using the aging method, which calculates the allowance based on how long a receivable has been outstanding, taking into account the historical credit loss rate and adjusting for both current conditions and forecasts of economic conditions into that expected credit loss rate. The adoption of ASU 2016-13 did not have a material impact on the Company's consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement, which modifies the disclosure requirements of fair value measurements in Topic 820. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-13 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-13 did not have a material impact on the Company's consolidated financial statements.
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In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other: Internal-Use Software, which helps simplify how entities evaluate the accounting for costs paid by a customer in a cloud computing arrangement that is a service contract. This standard is effective for fiscal years beginning after December 15, 2019. The Company adopted ASU 2018-15 effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which helps simplify how entities account for income taxes by removing various exceptions related to the recognition of deferred tax liabilities and updating other tax computation requirements. This standard is effective for fiscal years beginning after December 15, 2020. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Facilitation of Effects of Reference Rate Reform on Financial Reporting, which was created in response to concerns about structural risks of interbank offered rates ("IBORs") and the risk of cessation of the London Interbank Offered Rate ("LIBOR"). This standard provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard is effective for all entities as of March 12, 2020 through December 31, 2022. The Company adopted ASU 2020-04 effective in the first quarter of fiscal year 2020. The adoption of ASU 2020-04 did not have a material impact on the Company's consolidated financial statements.
In October 2020, the FASB issued ASU 2020-10, Codification Improvements ("ASU 2020-10"). The amendments in ASU 2020-10 contain improvements to the Codification by including disclosure guidance in appropriate disclosure and ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The ASU also provides clarification to various codification topics to improve consistency in guidance application. The amendments are effective for interim and annual reporting periods in fiscal years beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating ASU 2020-10 and expects no material impact to our consolidated financial statements and related disclosures as a result of adoption.