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Item 8. Financial Statements and Supplementary Data

2022-02-23 compared with 2021-02-26 · 257 added, 352 removed, 643 unchanged (49% of the section changed)

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CONSOLIDATED BALANCE SHEETS

At the End of Fiscal Year 2020 2019

At the End of Year 2021 2020

(In millions, except par values)

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360.0 shares authorized;

250.8 and 249.9 shares issued and outstanding at the end of fiscal 2020 and 2019, respectively

250.9 and 250.8 shares issued and outstanding at the end of 2021 and 2020

Additional paid-in-capital 1,935.6 1,801.7

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CONSOLIDATED STATEMENTS OF INCOME

Fiscal Years 2020 2019 2018

2021 2020 2019

(In millions, except per share data)

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Other income, net 41.3 13.4 15.5

Total non-operating expense, net ( 24.8 ) ( 31.1 ) ( 42.7 )

Total non-operating income (expense), net 13.6 ( 24.8 ) ( 31.1 )

Income before taxes 574.6 395.0 344.8

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Fiscal Years 2020 2019 2018

2021 2020 2019

(In millions)

Net income $ 492.8 $ 390.6 $ 514.5

Foreign currency translation adjustments, net of tax $ 0.5 in 2020, and $ 0.1 in 2019 and 2018, respectively

Foreign currency translation adjustments, net of tax $ 1.0 in 2021, $ 0.5 in 2020, and $ 0.1 in 2019

( 64.0 ) 77.1 10.3

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(In millions)

Balance at the end of fiscal 2017 248.9 $ 0.2 $ 1,461.1 $ 1,084.6 $ ( 131.4 ) $ 2,414.5 $ — $ 2,414.5

Balance at the end of 2018 250.9 $ 0.3 $ 1,591.9 $ 1,268.3 $ ( 186.1 ) $ 2,674.4 $ 0.4 $ 2,674.8

Net income — — — 514.3 — 514.3 0.2 514.5

Other comprehensive loss — — — — ( 54.7 ) ( 54.7 ) — ( 54.7 )

Other comprehensive income — — — — 9.3 9.3 — 9.3

Comprehensive income 523.6 523.8

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Noncontrolling interest investments — — ( 0.8 ) — — ( 0.8 ) 0.8 —

Tax benefit from stock option exercises — — — 3.6 — 3.6 — 3.6

Balance at the end of fiscal 2018 250.9 $ 0.3 $ 1,591.9 $ 1,268.3 $ ( 186.1 ) $ 2,674.4 $ 0.4 $ 2,674.8

Balance at the end of 2019 249.9 $ 0.2 $ 1,692.8 $ 1,602.8 $ ( 176.8 ) $ 3,119.0 $ 1.4 $ 3,120.4

Net income — — — 389.9 — 389.9 0.7 390.6

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Noncontrolling interest investments — — — — — — ( 0.4 ) ( 0.4 )

Balance at the end of fiscal 2019 249.9 $ 0.2 $ 1,692.8 $ 1,602.8 $ ( 176.8 ) $ 3,119.0 $ 1.4 $ 3,120.4

Balance at the end of 2020 250.8 $ 0.3 $ 1,801.7 $ 1,893.4 $ ( 98.5 ) $ 3,596.9 $ 1.7 $ 3,598.6

Net income 492.7 492.7 0.1 492.8

Other comprehensive income — — — — 78.3 78.3 — 78.3

Other comprehensive loss — — — — ( 63.2 ) ( 63.2 ) — ( 63.2 )

Comprehensive income 429.5 429.6

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Noncontrolling interest investments — — 0.6 — — 0.6 ( 1.8 ) ( 1.2 )

Balance at the end of fiscal 2020 250.8 $ 0.3 $ 1,801.7 $ 1,893.4 $ ( 98.5 ) $ 3,596.9 $ 1.7 $ 3,598.6

Balance at the end of 2021 250.9 $ 0.3 $ 1,935.6 $ 2,170.5 $ ( 161.7 ) $ 3,944.7 $ — $ 3,944.7

See accompanying Notes to the Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Fiscal Years 2020 2019 2018

2021 2020 2019

(In millions)

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Amortization expense 138.6 157.8 167.8

Provision for credit losses 7.1 6.5 3.4

Deferred income taxes ( 26.9 ) ( 52.9 ) ( 220.2 )

Non-cash restructuring expense 11.4 2.1 0.5

Stock-based compensation 122.6 83.0 75.0

(Income) loss from equity method investments, net of dividends ( 21.0 ) ( 7.8 ) 1.9

Provision for excess and obsolete inventories 16.2 7.3 7.2

Divestitures (gain) loss, net ( 43.9 ) ( 12.2 ) ( 12.4 )

Other, net 19.2 42.4 10.1

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Purchases of property and equipment ( 46.1 ) ( 56.8 ) ( 69.0 )

Purchases of short-term investments — — ( 24.0 )

Proceeds from maturities of short-term investments — — 6.2

Proceeds from sales of short-term investments — — 196.8

Net proceeds from sale of businesses 67.3 27.5 0.5

Net proceeds from sale of property and equipment 20.8 0.4 0.4

Other, net ( 9.4 ) ( 1.0 ) 13.6

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Other, net ( 1.6 ) ( 16.5 ) ( 14.4 )

Net cash provided by (used in) financing activities ( 400.3 ) ( 292.6 ) 989.4

Net cash used in financing activities ( 447.7 ) ( 400.3 ) ( 292.6 )

Effect of exchange rate changes on cash and cash equivalents ( 11.3 ) 8.6 ( 0.4 )

Net increase (decrease) in cash and cash equivalents 48.5 16.7 ( 186.0 )

Cash and cash equivalents - beginning of fiscal year 189.2 172.5 358.5

Cash and cash equivalents - end of fiscal year $ 237.7 $ 189.2 $ 172.5

Net increase in cash and cash equivalents 88.0 48.5 16.7

Cash and cash equivalents - beginning of year 237.7 189.2 172.5

Cash and cash equivalents - end of year $ 325.7 $ 237.7 $ 189.2

Supplemental cash flow disclosure:

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We generate revenue primarily through the sale of our hardware, software, maintenance and support, professional services, and subscriptions.

Use of Estimates

The preparation of financial statements in accordance with U.S.

generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Estimates and assumptions are used for revenue recognition, including determining the nature and timing of satisfaction of performance obligations and determining standalone selling price (“SSP”) of performance obligations, provision for credit losses, sales returns reserve, inventory valuation, warranty costs, investments, acquired intangibles, goodwill and intangibles impairments, other long-lived asset impairments, stock-based compensation, and income taxes.

We base our estimates on historical experience and various other assumptions we believe to be reasonable and i nputs into our estimates consider the economic implications of COVID-19.

Actual results that we experience may differ materially from our estimates.

Basis of Presentation

We use a 52-53 week fiscal year ending on the Friday nearest to December 31.

Fiscal 2020 and 2018 were both 52-week years ending on January 1, 2021 and December 28, 2018, respectively.

Fiscal 2019 was a 53-week year ended on January 3, 2020.

Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

These Consolidated Financial Statements include our results of our consolidated subsidiaries.

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Noncontrolling interests represent the noncontrolling stockholders’ proportionate share of the net assets and results of operations of our consolidated subsidiaries.

We present revenue and cost of sales separately for products, services, and subscriptions.

Product revenue includes hardware and software licenses;

service revenue includes maintenance and support for hardware and software products and professional services;

subscription revenue includes software as a service (“SaaS”), data, and hosting services.

We use a 52–53 week fiscal year ending on the Friday nearest to December 31.

Fiscal 2021 and 2020 were both 52-week years ending on December 31, 2021 and January 1, 2021, respectively.

Fiscal 2019 was a 53-week year ended on January 3, 2020.

Unless otherwise stated, all dates refer to our fiscal year and fiscal periods.

Use of Estimates

The preparation of financial statements in accordance with U.S.

generally accepted accounting principles (“GAAP”) requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.

Estimates and assumptions are used for revenue recognition, including determining the nature and timing of satisfaction of performance obligations and determining standalone selling price (“SSP”) of performance obligations, provision for credit losses, sales returns reserve, inventory valuation, warranty costs, investments, acquired intangibles, goodwill and intangible asset impairment analysis, other long-lived asset impairment analysis, stock-based compensation, and income taxes.

We base our estimates on historical experience and various other assumptions we believe to be reasonable .

Actual results that we experience may differ materially from our estimates.

Reportable Segments

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Descriptions are as follows:

Product revenue includes hardware and software licenses.

Hardwar e is recognized when the control of the product transfers to the customer, which is generally when the product is shipped.

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In general, our contracts do not provide for customer specific acceptances.

Service revenue includes hardware and software maintenance and support and professional services.

Hardware maintenance and support, commonly called extended warranty, entitles the customer to receive replacement parts and repair services.

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Revenue for the combined performance is recognized over time as the work progresses because of the continuous transfer of control to the customer.

Subscription revenue includes software as a service (“SaaS”), data, and hosting services.

SaaS may be sold with devices used to collect, generate, and transmit data.

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Hosting services are distinct from the underlying software.

Subscription terms generally range from month-to-month to three years .

Subscription terms generally range from month-to-month to one to three years .

Subscription revenue is recognized monthly over the subscription term, commencing from activation.

Deferred Costs to Obtain Customer Contracts

Our incremental cost of obtaining contracts, which consists of sales commissions related to customer contracts that include maintenance or subscription revenue, are deferred if the contractual term is greater than a year or if renewals are expected, and the renewal commission is not commensurate with the initial commission.

These commission costs are deferred and amortized over the benefit period, which is either the contract term or the shorter of customer or product life that ranges from three to seven years .

We have elected the practical expedient to exclude contracts with an amortization period of a year or less from this deferral requirement.

Remaining Performance Obligations

Remaining performance obligations represent contracted revenue for which goods or services have not been delivered.

The contracted revenue, which will be recognized in future periods, includes both invoiced amounts in deferred revenue as well as amounts that are not yet invoiced.

Foreign Currency Translation

Assets and liabilities of non-U.S.

subsidiaries that operate in local currencies are translated to U.S.

dollars at exchange rates in effect at the balance sheet date, with the resulting translation adjustments, net of tax, recorded in Accumulated other comprehensive loss within the Stockholders’ Equity section of the Consolidated Balance Sheets.

Income and expense accounts are translated at average monthly exchange rates during the year.

Derivative Financial Instruments

We enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on cash and certain trade and intercompany receivables and payables, primarily denominated in New Zealand Dollars, Brazil Real, Canadian Dollars, Norwegian Krone, and Euro.

T hese contracts reduce the exposure to fluctuations in foreign currency exchange rate movements, as the gains and losses associated with foreign currency balances are generally offset with the gains and losses on the forward contracts.

These instruments are marked-to-market through earnings every reporting period and generally range from one to two months in original maturity.

We occasionally enter into foreign currency forward co ntracts to hedge the purchase price of some of our larger business acquisitions.

We do not enter into foreign currency forward contracts for trading purposes.

As of the fiscal years ended 2020 and 2019, there were no derivative financial instruments outstanding that were accounted for as hedges.

Concentrations of Risk

Cash and cash equivalents are maintained with several financial institutions.

Deposits held with banks may exceed the amount of insurance provided on such deposits.

Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable credit and therefore bear minimal credit risk.

We are also exposed to credit risk in our trade receivables, which are derived from sales to end-user customers in diversified industries as well as various resellers.

We perform ongoing credit evaluations of our customers’ financial conditions and limit the amount of credit extended, when deemed necessary, but generally do not require collateral.

In addition, we rely on a limited number of suppliers for a number of our critical components.

Accounts Receivable, Net

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Both billed and unbilled amounts due are stated at their net estimated realizable value.

The unbilled receivables were $ 138.7 million and $ 129.5 million at the end of fiscal 2020 and 2019, respectively.

The unbilled receivables were $ 39.5 million and $ 138.7 million at the end of 2021 and 2020.

We maintain an allowance for credit losses to provide for the estimated amount of receivables that will not be collected.

Each reporting period, we evaluate the collectability of our trade accounts receivable based on a number of factors such as age of the accounts receivable balances, credit quality, historical experience, and current and future economic conditions that may affect a customer’s ability to pay.

Changes in our allowance for credit losses at the end of fiscal 2020, 2019 and 2018 were as follows:

Fiscal Years 2020 2019 2018

(In millions)

Balance at beginning of period $ 5.9 $ 4.6 $ 3.6

Acquired allowances — 0.2 1.6

Provision for credit losses 7.1 6.5 3.4

Write-offs, net of recoveries ( 6.0 ) ( 5.4 ) ( 4.0 )

Balance at end of period $ 7.0 $ 5.9 $ 4.6

At the end of 2021 and 2020, our allowance for credit losses was $ 7.0 million.

The provision for credit losses for the years ended 2021, 2020 and 2019 were $ 2.6 million, $ 7.1 million, and $ 6.5 million.

Deferred Costs to Obtain Customer Contracts

Sales commissions incurred in obtaining contracts that include maintenance or subscription revenue are deferred if the contractual term is greater than a year or if renewals are expected, and the renewal commission is not commensurate with the initial commission.

These commission costs are deferred and amortized over the estimated benefit period, which is either the contract term or the shorter of customer life or product life that ranges from three to seven years .

Contracts with an amortization period of a year or less from this deferral requirement are expensed as incurred.

At the end of 2021 and 2020, deferred costs to obtain customer contracts were $ 59.7 million and $ 51.3 million.

These costs are included in Other non-current assets in the Consolidated Balance Sheets.

There was no impairment loss in relation to the costs capitalized for the periods presented.

Amortization expense related to deferred costs to obtain customer contracts was $ 25.9 million, $ 22.8 million, and $ 22.3 million, for 2021, 2020, and 2019.

This expense is included in Sales and marketing expense in our Consolidated Statements of Income.

Inventories are stated at the lower of cost or net realizable value.

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Property and Equipment, Net

Property and equipment, net is stated at cost less accumulated depreciation.

Depreciation of property and equipment is computed using the straight-line method over the shorter of the estimated useful lives or the lease terms when applicable.

Property and equipment are depreciated using the straight-line method over the shorter of the estimated useful lives or the lease terms when applicable.

Useful lives generally range from four to six years for machinery and equipment, five to ten years for furniture and fixtures, two to five years for computer equipment and software, thirty-nine years for buildings, and the life of the lease for leasehold improvements.

We capitalize eligible costs to acquire or develop certain internal-use software that are incurred subsequent to the preliminary project stage.

Capitalized costs related to internal-use software are amortized using the straight-line method over the estimated useful lives of the assets, which range generally from two to five years .

The costs of repairs and maintenance are expensed when incurred, while expenditures for refurbishments and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized.

Depreciation expense was $ 39.7 million , $ 39.4 million and $ 35.6 million in fiscal 2020, 2019 and 2018, respectively.

We capitalize eligible costs to acquire or develop certain internal-use software and amortize those assets using the straight-line method over the estimated useful lives of the assets, which range from two to five years .

We determine if an arrangement is a lease at inception.

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Business Combinations

We allocate the fair value of purchase consideration to the assets acquired, liabilities assumed, and non-controlling interests in the acquiree based on their fair values at the acquisition date, with any excess purchase price recognized as goodwill.

When determining the fair values of assets acquired, liabilities assumed, and non-controlling interests in the acquiree, we make significant estimates and assumptions, especially with respect to intangible assets.

We account for business combinations using the acquisition method of accounting whereby certain identifiable assets and liabilities of the acquired business and any noncontrolling interest in the acquiree are recorded at their estimated fair values as of the acquisition date.

Any purchase consideration in excess of the estimated fair values of the net assets acquired is recorded as goodwill.

Acquisition-related expenses and related restructuring costs are expensed as incurred.

When determining the fair values of certain assets acquired, liabilities assumed, and noncontrolling interests in the acquiree, we make significant estimates and assumptions, especially concerning intangible assets.

Critical estimates when valuing intangible assets include expected future cash flows based on consideration of future growth rates and margins, customer attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates.

Fair value estimates are based on the assumptions we believe a market participant would use in pricing the asset or liability.

Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisition as additional information about conditions existing at the acquisition date becomes available.

Goodwill and Purchased Intangible Assets

Goodwill represents the excess of the purchase consideration over the fair value of the net tangible and identifiable intangible assets acquired in a business combination.

Intangible assets acquired individually, with a group of other assets, or in a business combination are recorded at fair value.

Identifiable intangible assets are comprised of technology, patents, licenses, customer contracts, acquired backlog, trademarks, and in-process research and development.

Identifiable intangible assets are amortized over the period of estimated benefit using the straight-line method and have estimated useful lives ranging from three years to ten years with a weighted average useful life of approximately seven years .

We write off fully amortized intangible assets when those assets are no longer used.

Goodwill is not subject to amortization, but is subject to, at a minimum, an annual assessment for impairment.

Impairment of Goodwill, Intangible Assets, and Other Long-Lived Assets

We evaluate goodwill on an annual basis or more frequently if indicators of potential impairment exist.

We utilize either a qualitative or quantitative approach to assess the likelihood of impairment as of the first day of the fourth quarter.

When performing the qualitative assessment, we consider macroeconomic conditions, industry and market considerations, overall financial performance, and other relevant events and factors that may impact the reporting units.

When performing the quantitative assessment, we compare the reporting unit’s carrying amount, including goodwill, to the reporting unit's fair value.

When we perform a quantitative test, the estimation of the fair value of a reporting unit involves the use of certain estimates and assumptions including expected future operating performance using risk-adjusted discount rates.

When performing the qualitative approach, we consider macroeconomic conditions, industry and market considerations, overall financial performance, and other relevant events and factors that may impact the reporting units.

When performing the quantitative approach, we compare the reporting unit’s carrying amount, including goodwill, to the reporting unit's fair value.

The estimation of a reporting unit's fair value involves using estimates and assumptions including expected future operating performance using risk-adjusted discount rates.

Actual future results may differ from those estimates.

If the carrying amount of the reporting unit exceeds its fair value, an impairment loss is recognized.

Identifiable intangible assets and long-lived assets with finite lives are amortized over their estimated useful lives on a straight-line basis.

Changes in circumstances such as technological advances, changes to business models, or changes in the capital strategy could result in a revised useful life.

If the useful life of an asset is revised, the net book value of the estimated residual value is amortized over its revised remaining useful life.

Intangible assets and long-lived assets are evaluated for impairment according to their asset groups whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable based on their future cash flows.

Intangible Assets

Intangible assets acquired individually, with a group of other assets, or in a business combination are recorded at fair value.

Our intangible assets are amortized over the period of estimated benefit using the straight-line method over their estimated useful lives, which range from three years to ten years and have a weighted-average useful life of approximately seven years .

We write off fully amortized intangible assets when those assets are no longer used.

We review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of those assets may not be recoverable based on their future cash flows.

The estimated future cash flows are primarily based upon assumptions about expected future operating performance.

Assets held for disposal are measured at fair value less selling costs, and assets that are no longer in use are written off entirely at their cease-use dates.

Stock-Based Compensation

Stock compensation expense is based on the measurement date fair value of the awards, net of expected forfeitures.

Expense is generally recognized on a straight-line basis over the requisite service period of the stock awards.

The estimate of the forfeiture rate is based on historical experience.

We accrue for warranty costs as part of our cost of sales based on associated material product costs, technical support labor costs, and costs incurred by third parties performing work on our behalf.

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When products sold include warranty provisions, they are covered by a warranty for periods ranging from one year to two years .

Accrued warranty expenses o f $ 13.8 million and $ 16.3 million are included in Other current liabilities in the Consolidated Balance Sheets at the end of fiscal 2020 and 2019, respectively.

Guarantees, Including Indirect Guarantees of Indebtedness of Others

In the normal course of business to facilitate sales of our products, we indemnify other parties, including customers, lessors, and parties to other transactions with us with respect to certain matters.

We may agree to hold the other party harmless against losses arising from a breach of representations or covenants, or out of intellectual property infringement or other claims made against certain parties.

These agreements may limit the time within which an indemnification claim can be made and the amount of the claim.

In connection with divesting some of our businesses or assets, we may also indemnify purchasers for certain matters in the normal course of business, such as breaches of representations, covenants, or excluded liabilities.

In addition, we entered into indemnification agreements with our officers and directors, and our bylaws contain similar indemnification obligations to our agents.

It is not possible to determine the maximum potential amount under these indemnification agreements due to the limited history of prior indemnification claims and the unique facts and circumstances involved in each particular agreement.

Historically, payments made under these agreements were not material, and no liabilities have been recorded for these obligations in the Consolidated Balance Sheets at the end of fiscal 2020 and 2019.

Accrued warranty expenses o f $ 17.1 million and $ 13.8 million are included in Other current liabilities in the Consolidated Balance Sheets at the end of 2021 and 2020.

Foreign Currency Translation

Assets and liabilities recorded in foreign currency are translated to U.S.

dollars at the exchange rate s on the balance sheet date.

Revenue and expense are translated at average monthly exchange rates during the year.

Translation adjustments resulting from this process are recorded to other comprehensive income.

Stock-Based Compensation

Stock-based compensation expense is based on the measurement date fair value of the awards, net of expected forfeitures.

Expense is generally recognized on a straight-line basis over the requisite service period of the stock awards.

The estimate of the forfeiture rate is based on historical experience.

Advertising and Promotional Costs

We expense all advertising and promotional costs as incurred.

Advertising and promotional expense was approximately $ 28.6 million, $ 42.7 million, and $ 42.7 million, in fiscal 2020, 2019, and 2018, respectively.

Advertising and promotional costs are expensed as incurred.

Advertising and promotional expense was approximately $ 31.6 million, $ 28.6 million, and $ 42.7 million, in 2021, 2020, and 2019.

Research and Development Costs

Research and development costs are charged to expense as incurred.

Costs of software developed for external sale subsequent to reaching technical feasibility were not significant and were expensed as incurred.

We received third-party funding of approximately $ 16.3 million , $ 16.5 million, and $ 19.5 million in fiscal 2020, 2019, and 2018, respectively.

Research and development costs are expensed as incurred.

Development costs for software to be sold subsequent to reaching technical feasibility were not significant and were expensed as incurred.

We received third party funding of approximately $ 12.6 million, $ 16.3 million, and $ 16.5 million in 2021, 2020, and 2019.

We offset research and development expense with any unconditional third party funding earned and retain the rights to any technology developed under such arrangements.

Computation of Earnings Per Share

The number of shares used in the calculation of basic earnings per share represents the weighted-average common shares outstanding during the period and excludes any potentially dilutive securities.

The dilutive effects of outstanding stock options, restricted stock units (“RSUs”), and shares to be purchased under our Employee Stock Purchase Plan (“ESPP”) are included in diluted earnings per share unless they are anti-dilutive.

Income taxes are accounted for under the liability method, whereby deferred tax assets or liability account balances are calculated at the balance sheet date using current tax laws and rates in effect for the year in which the differences are expected to affect taxable income.

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The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in our income tax provision and, therefore, could have a material impact on our income tax provision, net income, and cash flows.