FITBIT INC, 10-Q filed on 11/4/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Oct. 1, 2016
Oct. 31, 2016
Common Class A [Member]
Oct. 31, 2016
Common Class B [Member]
Entity Information [Line Items]
 
 
 
Entity Registrant Name
FITBIT INC 
 
 
Entity Central Index Key
0001447599 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Non-accelerated Filer 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Oct. 01, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
Q3 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
170,120,929 
53,627,962 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Oct. 1, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 284,220 
$ 535,846 
Marketable securities
387,882 
128,632 
Accounts receivable, net
461,351 
469,260 
Inventories
214,955 
178,146 
Prepaid expenses and other current assets
86,372 
43,530 
Total current assets
1,434,780 
1,355,414 
Property and equipment, net
94,311 
44,501 
Goodwill
25,217 
22,200 
Intangible assets, net
14,578 
12,216 
Deferred tax assets
110,814 
83,020 
Other assets
10,526 
1,758 
Total assets
1,690,226 
1,519,066 
Current liabilities:
 
 
Accounts payable
253,138 
260,842 
Accrued liabilities
218,526 
194,977 
Deferred revenue
45,001 
44,448 
Fitbit Force recall reserve
1,494 
5,122 
Income taxes payable
1,231 
2,868 
Total current liabilities
519,390 
508,257 
Other liabilities
53,732 
29,358 
Total liabilities
573,122 
537,615 
Commitments and contingencies
   
   
Stockholders’ equity:
 
 
Class A and Class B common stock
22 
21 
Additional paid-in capital
832,257 
737,820 
Accumulated other comprehensive income (loss)
(1,590)
691 
Retained earnings
286,415 
242,919 
Total stockholders’ equity
1,117,104 
981,451 
Total liabilities and stockholders’ equity
$ 1,690,226 
$ 1,519,066 
Condensed Consolidated Statements of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2016
Sep. 30, 2015
Oct. 1, 2016
Sep. 30, 2015
Income Statement [Abstract]
 
 
 
 
Revenue
$ 503,802 
$ 409,262 
$ 1,595,686 
$ 1,146,428 
Cost of revenue
263,144 
213,249 
876,304 
593,664 
Gross profit
240,658 
196,013 
719,382 
552,764 
Operating expenses:
 
 
 
 
Research and development
82,972 
42,890 
235,129 
95,808 
Sales and marketing
79,872 
65,115 
305,061 
178,672 
General and administrative
33,333 
20,698 
106,297 
48,327 
Change in contingent consideration
(7,704)
Total operating expenses
196,177 
128,703 
646,487 
315,103 
Operating income
44,481 
67,310 
72,895 
237,661 
Interest income (expense), net
970 
(216)
2,391 
(1,062)
Other income (expense), net
(1,037)
(744)
68 
(59,129)
Income before income taxes
44,414 
66,350 
75,354 
177,470 
Income tax expense
18,294 
20,500 
31,900 
65,958 
Net income
26,120 
45,834 
43,496 
111,512 
Less: noncumulative dividends to preferred stockholders
(2,526)
Less: undistributed earnings to participating securities
(50,316)
Net income attributable to common stockholders—basic
26,120 
45,834 
43,496 
58,670 
Add: adjustments for undistributed earnings to participating securities
7,655 
Net income attributable to common stockholders—diluted
$ 26,120 
$ 45,834 
$ 43,496 
$ 66,325 
Net income per share attributable to common stockholders:
 
 
 
 
Basic (in dollars per share)
$ 0.12 
$ 0.22 
$ 0.20 
$ 0.57 
Diluted (in dollars per share)
$ 0.11 
$ 0.19 
$ 0.18 
$ 0.48 
Shares used to compute net income per share attributable to common stockholders:
 
 
 
 
Basic (in shares)
222,412 
206,657 
219,079 
102,741 
Diluted (in shares)
243,687 
243,660 
242,652 
136,985 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2016
Sep. 30, 2015
Oct. 1, 2016
Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
Net income
$ 26,120 
$ 45,834 
$ 43,496 
$ 111,512 
Cash flow hedges:
 
 
 
 
Change in unrealized gain (loss) on cash flow hedges, net of tax benefit (expense) of $155, $ —, $(1,315), and $ —, respectively
(221)
1,466 
2,784 
1,466 
Less: reclassification for realized net gains included in net income, net of tax expense (benefit) of $ —, $ —, $509, and $ —, respectively
(2,850)
(548)
(4,828)
(548)
Net change, net of tax
(3,071)
918 
(2,044)
918 
Change in foreign currency translation adjustment, net of tax
(39)
40 
(199)
125 
Change in unrealized loss on available-for-sale investments, net of tax
(164)
(6)
(38)
(6)
Comprehensive income
$ 22,846 
$ 46,786 
$ 41,215 
$ 112,549 
Condensed Consolidated Statements of Comprehensive Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Oct. 1, 2016
Sep. 30, 2015
Oct. 1, 2016
Sep. 30, 2015
Statement of Comprehensive Income [Abstract]
 
 
 
 
Change in unrealized gain (loss) on cash flow hedges, tax
$ 155 
$ 0 
$ (1,315)
$ 0 
Reclassification for realized net gains included in net income, tax
$ 0 
$ 0 
$ 509 
$ 0 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Oct. 1, 2016
Sep. 30, 2015
Cash Flows from Operating Activities
 
 
Net income
$ 43,496 
$ 111,512 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Provision for inventory obsolescence
1,014 
4,537 
Depreciation
23,883 
12,372 
Write-off of property and equipment
762 
Amortization of intangible assets
1,578 
1,200 
Revaluation of redeemable convertible preferred stock warrant liability
56,655 
Stock-based compensation
58,175 
25,684 
Change in contingent consideration
(7,704)
Deferred income taxes
(27,794)
(32,288)
Excess of tax benefit from stock-based compensation
(25,542)
Other
(323)
(109)
Changes in operating assets and liabilities, net of acquisitions:
 
 
Accounts receivable
7,756 
(5,500)
Inventories
(50,883)
(165,153)
Prepaid expenses and other assets
(38,788)
(4,664)
Fitbit Force recall reserve
(3,628)
(10,817)
Accounts payable
(13,125)
119,768 
Accrued liabilities and other liabilities
43,285 
30,657 
Deferred revenue
554 
17,520 
Income taxes payable
19,756 
(28,159)
Net cash provided by operating activities
40,176 
125,480 
Cash Flows from Investing Activities
 
 
Purchase of property and equipment
(66,798)
(17,748)
Purchases of marketable securities
(552,752)
(124,713)
Sales of marketable securities
45,011 
12,070 
Maturities of marketable securities
249,269 
Acquisitions, net of cash acquired
(5,600)
(11,037)
Net cash used in investing activities
(330,870)
(141,428)
Cash Flows from Financing Activities
 
 
Payments of offering costs
(1,236)
(4,772)
Proceeds from issuance of common stock
18,316 
940 
Taxes paid related to net share settlement of restricted stock units
(3,228)
Excess of tax benefit from stock-based compensation
25,542 
Net proceeds from initial public offering
420,885 
Proceeds from issuance of debt and revolving credit facility, net debt discount
160,000 
Repayment of debt
(294,503)
Net cash provided by financing activities
39,394 
282,550 
Net increase (decrease) in cash and cash equivalents
(251,300)
266,602 
Effect of exchange rate on cash and cash equivalents
(326)
52 
Cash and cash equivalents at beginning of period
535,846 
195,626 
Cash and cash equivalents at end of period
284,220 
462,280 
Supplemental Disclosure
 
 
Cash paid for interest
396 
374 
Cash paid for income taxes
28,008 
120,774 
Supplemental Disclosure of Non-Cash Investing and Financing Activity
 
 
Purchase of property and equipment included in accounts payable and accrued liabilities
18,177 
6,344 
Conversion of redeemable convertible preferred stock into Class B common stock
67,814 
Reclassification of redeemable convertible preferred stock warrant liability to additional paid-in capital
72,452 
Issuance of redeemable convertible preferred stock upon net exercise of redeemable convertible preferred stock warrants
56,678 
Deferred offering costs included in accounts payable and accruals
354 
Issuance of common stock in connection with acquisitions
$ 0 
$ 13,317 
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation and Summary of Significant Accounting Policies
 
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine months ended October 1, 2016 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on February 29, 2016. There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K.

The Company’s fiscal year ends on December 31 of each year. In the first quarter of 2016, the Company adopted a 4-4-5 week quarterly calendar, which, for the 2016 fiscal year, is comprised of four fiscal quarters ending on April 2, 2016, July 2, 2016, October 1, 2016, and December 31, 2016. The Company did not adjust operating results for quarters prior to 2016. There were 91 and 92 days in the three months ended October 1, 2016 and September 30, 2015, respectively, and 275 and 273 days in the nine months ended October 1, 2016 and September 30, 2015, respectively.

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The primary estimates and assumptions made by management related to revenue recognition, reserves for sales returns and incentives, reserves for warranty, valuation of stock options, fair value of derivative assets and liabilities, allowance for doubtful accounts, inventory valuation, accruals for the Fitbit Force recall, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the number of reporting segments, the recoverability of intangible assets and their useful lives, contingencies, and the valuations of deferred income tax assets and uncertain tax positions. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.

Non-Monetary Transaction

The Company entered into an agreement with a third party during the three months ended October 1, 2016 to exchange inventory for advertising credits and cash. The Company recorded the transaction based on the estimated fair value of the products exchanged. The Company recorded $15.0 million of revenue during the three months ended October 1, 2016 related to the transaction. The $13.0 million of unused advertising credits remaining as of October 1, 2016 were recorded in prepaid expenses and other current assets and other assets. Such credits are expected to be used over three years, and will be expensed as advertising services are received.

Out-of-Period Adjustment

During the first quarter of 2016, the Company identified an error, which resulted in an understatement of income tax expense by $3.0 million for the year ended December 31, 2015. The Company recorded an out-of-period adjustment to correct the error in the quarter ended April 2, 2016. The Company assessed the materiality of this error and concluded the error was not material to 2015 consolidated financial statements and is not expected to be material to 2016 consolidated financial statements, and therefore, the Company recorded the correction in the first quarter of 2016.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09 (ASC 606), Revenue from Contracts with Customers, which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for the Company on January 1, 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance on identifying performance obligations and licensing implementation. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and has not yet selected a transition method.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lease assets and lease liabilities arising from leases, including operating leases, to be recognized on the balance sheet. ASU 2016-02 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will become effective for the Company on January 1, 2017 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments. ASU 2016-13 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This ASU provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 will become effective for the Company on January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Fair Value Measurements
Fair Value Measurements
Fair Value Measurements
 
The carrying values of the Company’s accounts receivable, accounts payable, and accrued liabilities approximated their fair values due to the short period of time to maturity or repayment.
 
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
October 1, 2016
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
97,719

 
$

 
$
97,719

U.S. government agencies

 
86,748

 
86,748

Corporate debt securities

 
321,872

 
321,872

Derivative assets

 
6,882

 
6,882

Total
$
97,719

 
$
415,502

 
$
513,221

Liabilities:
 
 
 
 
 
Derivative liabilities
$

 
$
3,535

 
$
3,535

 
 
December 31, 2015
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
248,128

 
$

 
$
248,128

U.S. government agencies

 
113,314

 
113,314

Corporate debt securities

 
193,964

 
193,964

Derivative assets

 
6,002

 
6,002

Total
$
248,128

 
$
313,280

 
$
561,408

Liabilities:
 
 
 
 
 
Derivative liabilities
$

 
$
2,640

 
$
2,640


 
The fair value of the Company’s Level 1 financial instruments is based on quoted market prices in active markets for identical instruments. The fair value of the Company’s Level 2 financial instruments is based on observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data.

In addition, Level 2 assets and liabilities include derivative financial instruments associated with hedging activity, which are further discussed in Note 3. Derivative financial instruments are initially measured at fair value on the contract date and are subsequently remeasured to fair value at each reporting date using inputs such as spot rates, forward rates, and discount rates. There is not an active market for each hedge contract, but the inputs used to calculate the value of the instruments are tied to active markets.

There were no Level 3 assets or liabilities as of October 1, 2016 and December 31, 2015. There have been no transfers between fair value measurement levels during the three and nine months ended October 1, 2016 and September 30, 2015.
Financial Instruments
Financial Instruments
Financial Instruments

Cash, Cash Equivalents, and Marketable Securities

The Company’s marketable securities are classified as available-for-sale as of the balance sheet date and are reported at fair value with unrealized gains and losses reported, net of tax, as a separate component of accumulated other comprehensive income (loss) in stockholders’ equity. Because the Company views marketable securities as available to support current operations as needed, it has classified all available-for-sale securities as current assets. Realized gains or losses and other-than-temporary impairments, if any, on available-for-sale securities are reported in other income (expense), net as incurred.

Investments are reviewed periodically to identify potential other-than-temporary impairments. No impairment loss has been recorded on the securities included in the tables below because the Company believes that the decrease in fair value of these securities is temporary and expects to recover up to, or beyond, the initial cost of investment for these securities.

The following table sets forth cash, cash equivalents, and marketable securities as of October 1, 2016 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
165,763

 
$

 
$

 
$
165,763

 
$
165,763

 
$

Money market funds
97,719

 

 

 
97,719

 
97,719

 

U.S. government agencies
86,691

 
58

 
(1
)
 
86,748

 

 
86,748

Corporate debt securities
322,021

 
5

 
(154
)
 
321,872

 
20,738

 
301,134

Total
$
672,194

 
$
63

 
$
(155
)
 
$
672,102

 
$
284,220

 
$
387,882






The following table sets forth cash, cash equivalents, and marketable securities as of December 31, 2015 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
109,072

 
$

 
$

 
$
109,072

 
$
109,072

 
$

Money market funds
248,128

 

 

 
248,128

 
248,128

 

U.S. government agencies
113,315

 
3

 
(4
)
 
113,314

 
63,464

 
49,850

Corporate debt securities
194,018

 
1

 
(55
)
 
193,964

 
115,182

 
78,782

Total
$
664,533

 
$
4

 
$
(59
)
 
$
664,478

 
$
535,846

 
$
128,632



The gross unrealized gains or losses on marketable securities as of October 1, 2016 and December 31, 2015 were not material. There were no available-for-sale investments as of October 1, 2016 and December 31, 2015 that have been in a continuous unrealized loss position for greater than twelve months.

The following table classifies marketable securities by contractual maturities (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
Due in one year
$
362,322

 
$
128,632

Due in one to two years
25,560

 

Total
$
387,882

 
$
128,632




Derivative Financial Instruments

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies. In order to manage this risk, the Company may hedge a portion of its foreign currency exposures related to outstanding monetary assets and liabilities as well as forecasted revenues and expenses, using foreign currency exchange forward or option contracts. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. The Company does not enter into derivative contracts for trading or speculative purposes.
 
Cash Flow Hedges
 
Beginning in the third quarter of 2015, the Company has entered into foreign currency derivative contracts designated as cash flow hedges to hedge certain forecasted revenue and expense transactions denominated in currencies other than the U.S. dollar. The Company’s cash flow hedges consist of forward contracts with maturities of 12 months or less.

The Company periodically assesses the effectiveness of its cash flow hedges. Effectiveness represents a derivative instrument’s ability to generate offsetting changes in cash flows related to the hedged risk. All elements of the hedged transaction are included in the effectiveness assessment. The Company records the gains or losses, net of tax, related to the effective portion of its cash flow hedges as a component of accumulated other comprehensive income (loss) in stockholders’ equity and subsequently reclassifies the gains or losses into revenue and operating expenses when the underlying hedged transactions are recognized. The Company records the gains or losses related to the ineffective portion of the cash flow hedges, if any, immediately in other income (expense), net. If the hedged transaction becomes probable of not occurring, the corresponding amounts in accumulated other comprehensive income (loss) would immediately be reclassified to other income (expense), net. Cash flows related to the Company’s cash flow hedging program are recognized as cash flows from operating activities in its statements of cash flows.

The Company had outstanding contracts with a total notional amount of $283.2 million and $63.3 million in cash flow hedges for forecasted revenue and expense transactions, respectively, as of October 1, 2016, and $254.1 million in cash flow hedges for forecasted revenue transactions as of December 31, 2015.

Balance Sheet Hedges

The Company enters into foreign exchange contracts to hedge certain monetary assets and liabilities that are denominated in currencies other than the functional currency of its subsidiaries. These foreign exchange contracts are carried at fair value, do not qualify for hedge accounting treatment, and are not designated as hedging instruments. Changes in the value of the foreign exchange contracts are recognized in other income (expense), net and offset the foreign currency gain or loss on the underlying net monetary assets or liabilities.

The Company had outstanding balance sheet hedges with a total notional amount of $141.0 million and $104.8 million as of October 1, 2016 and December 31, 2015, respectively.
 
Fair Value of Foreign Currency Derivatives

The foreign currency derivative contracts that were not settled at the end of the period are recorded at fair value, on a gross basis, in the condensed consolidated balance sheets. The following table presents the fair value of the Company’s foreign currency derivative contracts as of the periods presented (in thousands):
 
 
 
October 1, 2016
 
December 31, 2015
 
Balance Sheet Location
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
 
Fair Value Derivative
Assets
 
Fair Value Derivative Liabilities
Cash flow designated hedges
Prepaid expenses and other current assets
 
$
1,403

 
$

 
$
3,116

 
$

Cash flow designated hedges
Accrued liabilities
 

 
2,438

 

 
1,327

Hedges not designated
Prepaid expenses and other current assets
 
5,479

 

 
2,886

 

Hedges not designated
Accrued liabilities
 

 
1,097

 

 
1,313

Total fair value of derivative instruments
 
 
$
6,882

 
$
3,535

 
$
6,002

 
$
2,640



Financial Statement Effect of Foreign Currency Derivative Contracts

The following table presents the pre-tax impact of the Company’s foreign currency derivative contracts on other comprehensive income, or OCI, and the condensed consolidated statements of operations for the periods presented (in thousands):
 
 
 
Three Months Ended
 
Nine Months Ended
 
Income Statement Location
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
Foreign exchange cash flow hedges
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in OCI – effective portion
 
 
$
(560
)
 
$
1,466

 
$
975

 
$
1,466

Gain reclassified from OCI into income – effective portion
Revenue
 
3,060

 
580

 
1,511

 
580

Gain (loss) reclassified from OCI into income – effective portion
Operating expenses
 
(65
)
 
(32
)
 
2,343

 
(32
)
Gain (loss) recognized in income – ineffective portion
Other income (expense), net
 
76

 
104

 
(109
)
 
104

 
 
 
 
 
 
 
 
 
 
Foreign exchange balance sheet hedges
 
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
Other income (expense), net
 
$
(477
)
 
$
3,705

 
$
3,567

 
$
6,009



As of October 1, 2016, all net derivative gains related to the Company’s cash flow hedges will be reclassified from OCI into net income within the next 12 months.

Offsetting of Foreign Currency Derivative Contracts

The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. The Company generally enters into master netting arrangements, which mitigate credit risk by permitting net settlement of transactions with the same counterparty. The Company is not required to pledge, and is not entitled to receive, cash collateral related to these derivative instruments.
The following tables set forth the available offsetting of net derivative assets under the master netting arrangements as of October 1, 2016 and December 31, 2015 (in thousands):

 
October 1, 2016
 
 
 
 
 
 
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Foreign exchange contracts
$
6,882

 
$

 
$
6,882

 
$
3,528

 
$

 
$
3,354


 
December 31, 2015
 
 
 
 
 
 
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Assets
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Received
 
Net Amount
Foreign exchange contracts
$
6,002

 
$

 
$
6,002

 
$
2,100

 
$

 
$
3,902


The following tables set forth the available offsetting of net derivative liabilities under the master netting arrangements as of October 1, 2016 and December 31, 2015 (in thousands):

 
October 1, 2016
 
 
 
 
 
 
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Foreign exchange contracts
$
3,535

 
$

 
$
3,535

 
$
3,528

 
$

 
$
7


 
December 31, 2015
 
 
 
 
 
 
 
Gross Amounts Not Offset in Condensed Consolidated Balance Sheets
 
 
 
Gross Amounts of Recognized Liabilities
 
Gross Amounts Offset in the Condensed Consolidated Balance Sheets
 
Net Amounts Presented in Condensed Consolidated Balance Sheets
 
Financial Instruments
 
Cash Collateral Pledged
 
Net Amount
Foreign exchange contracts
$
2,640

 
$

 
$
2,640

 
$
2,100

 
$

 
$
540

Balance Sheet Components
Balance Sheet Components
Balance Sheet Components
 
Revenue Reserve
 
Revenue returns reserve activities were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
Beginning balances
$
80,277

 
$
35,265

 
$
74,045

 
$
26,559

Increases
46,654

 
46,990

 
166,205

 
100,342

Returns taken
(59,763
)
 
(41,043
)
 
(173,082
)
 
(85,689
)
Ending balances
$
67,168

 
$
41,212

 
$
67,168

 
$
41,212



Increases in the revenue returns reserve include provisions for open box returns and stock rotations.

Inventories
 
Inventories consisted of the following (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
Components
$
2,452

 
$
5,359

Finished goods
212,503

 
172,787

Total inventories
$
214,955

 
$
178,146


 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets consisted of the following (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
POP displays, net
$
28,721

 
$
9,990

Prepaid income taxes
12,539

 
11,889

Non-trade receivable
7,155

 
3,196

Derivative assets
6,882

 
6,002

Other
31,075

 
12,453

Total prepaid expenses and other current assets
$
86,372

 
$
43,530



Property and Equipment, Net
 
Property and equipment, net, consisted of the following (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
Tooling and manufacturing equipment
$
92,199

 
$
53,092

Furniture and office equipment
12,518

 
6,809

Purchased and internally-developed software
9,232

 
3,794

Leasehold improvements
25,931

 
8,388

Total property and equipment
139,880

 
72,083

Less: Accumulated depreciation and amortization
(45,569
)
 
(27,582
)
Property and equipment, net
$
94,311

 
$
44,501


 
Goodwill and Intangible Assets

The carrying amount of goodwill was $25.2 million and $22.2 million as of October 1, 2016 and December 31, 2015, respectively, and the increase in the carrying amount during the nine months ended October 1, 2016 was attributable to an acquisition in May 2016. See Note 11 for additional information.

The carrying amounts of the intangible assets as of October 1, 2016 and December 31, 2015 were as follows (in thousands, except useful life). In-process research and development is not amortized until the completion or abandonment of the related development.
 
October 1, 2016
 
December 31, 2015
 
Weighted Average Remaining Useful Life
(years)
 
Gross
 
Accumulated Amortization
 
Net
 
Gross
 
Accumulated Amortization
 
Net
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Developed technology
$
12,640

 
$
(2,796
)
 
$
9,844

 
$
12,640

 
$
(1,442
)
 
$
11,198

 
5.5
Trademarks and other
1,278

 
(484
)
 
794

 
1,278

 
(260
)
 
1,018

 
3.5
Total finite-lived intangible assets subject to amortization, net
13,918

 
(3,280
)
 
10,638

 
13,918

 
(1,702
)
 
12,216

 
 
In-process research and development
3,940

 

 
3,940

 

 

 

 
 
Total intangible assets, net
$
17,858

 
$
(3,280
)
 
$
14,578

 
$
13,918

 
$
(1,702
)
 
$
12,216

 
 


Total amortization expense related to intangible assets was $0.5 million for each of the three months ended October 1, 2016 and September 30, 2015, and $1.6 million and $1.2 million for the nine months ended October 1, 2016 and September 30, 2015, respectively.

The estimated future amortization expense of acquired finite-lived intangible assets to be charged to cost of revenue and operating expenses after October 1, 2016, is as follows (in thousands):
 
Cost of Revenue
 
Operating Expenses
 
Total
 
 
 
 
 
 
Remaining 2016
$
452

 
$
57

 
$
509

2017
1,806

 
230

 
2,036

2018
1,806

 
230

 
2,036

2019
1,806

 
230

 
2,036

2020
1,806

 
47

 
1,853

Thereafter
2,168

 

 
2,168

Total finite-lived intangible assets, net
$
9,844

 
$
794

 
$
10,638


















Accrued Liabilities
 
Accrued liabilities consisted of the following (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
Product warranty
$
62,941

 
$
40,212

Accrued sales and marketing
27,938

 
33,389

Employee related liabilities
26,518

 
27,394

Accrued sales incentives
20,660

 
24,324

Accrued co-op advertising and marketing development funds
19,233

 
29,077

Inventory received but not billed
16,069

 
4,292

Accrued manufacturing expense and freight
14,536

 
10,723

Sales taxes and VAT payable
6,991

 
8,349

Derivative liabilities
3,535

 
2,640

Customer deposits
2,878

 
2,062

Accrued legal fees
2,555

 
3,138

Other
14,672

 
9,377

Accrued liabilities
$
218,526

 
$
194,977



Product warranty reserve activities were as follows (in thousands)(1):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
Beginning balances
$
76,841

 
$
31,063

 
$
40,212

 
$
20,098

Charged to cost of revenue
30,814

 
15,687

 
109,324

 
37,752

Changes related to pre-existing warranties
(18,727
)
 
(8,968
)
 
(19,214
)
 
(8,968
)
Settlement of claims
(25,987
)
 
(12,710
)
 
(67,381
)
 
(23,810
)
Ending balances
$
62,941

 
$
25,072

 
$
62,941

 
$
25,072

 
(1)
Does not include reserves established as a result of the recall of the Fitbit Force. See the section titled “—Fitbit Force Recall Reserve” for additional information regarding such reserves.

During the three and nine months ended October 1, 2016, changes related to pre-existing warranties resulted primarily from a reduction in the estimated cost of replacement units. During the three and nine months ended September 30, 2015, changes related to pre-existing warranties resulted from a reduction in the estimated number of units to be replaced and in the estimated cost of replacement units.

Fitbit Force Recall Reserve
 
In March 2014, the Company announced a recall for one of its products, the Fitbit Force, or Fitbit Force Recall. The product recall, which is regulated by the U.S. Consumer Product Safety Commission, covered all Fitbit Force units sold since the product was first introduced in October 2013. The product recall program has no expiration date.
 
As a result of the product recall, the Company established reserves that include cost estimates for customer refunds, logistics and handling fees for managing product returns and processing refunds, obsolescence of on-hand inventory, cancellation charges for existing purchase commitments and rework of component inventory with the contract manufacturer, write-offs of tooling and manufacturing equipment, and legal settlement costs.

Fitbit Force Recall reserve activities were as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
Beginning balances
$
2,148

 
$
12,894

 
$
5,122

 
$
22,476

Charged (benefit) to cost of revenue

 

 

 
(2,040
)
Charged (benefit) to general and administrative

 
20

 

 
(53
)
Settlement of claims
(654
)
 
(1,255
)
 
(3,628
)
 
(8,724
)
Ending balances
$
1,494

 
$
11,659

 
$
1,494

 
$
11,659



Accumulated Other Comprehensive Income (Loss)

The components and activity of accumulated other comprehensive income, or AOCI, net of tax, were as follows (in thousands):

 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
Balance at December 31, 2014
$

 
$
37

 
$

 
$
37

Other comprehensive income (loss) before reclassifications
1,466

 
125

 
(6
)
 
1,585

Amounts reclassified from AOCI
(548
)
 

 

 
(548
)
Other comprehensive income (loss)
918

 
125

 
(6
)
 
1,037

Balance at September 30, 2015
$
918

 
$
162

 
$
(6
)
 
$
1,074


 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Currency Translation Adjustments
 
Unrealized Gains (Losses) on Available-for-Sale Investments
 
Total
Balance at December 31, 2015
$
751

 
$
(5
)
 
$
(55
)
 
$
691

Other comprehensive income (loss) before reclassifications
2,784

 
(199
)
 
(38
)
 
2,547

Amounts reclassified from AOCI
(4,828
)
 

 

 
(4,828
)
Other comprehensive income (loss)
(2,044
)
 
(199
)
 
(38
)
 
(2,281
)
Balance at October 1, 2016
$
(1,293
)
 
$
(204
)
 
$
(93
)
 
$
(1,590
)
Long-Term Debt
Long-Term Debt
Long-Term Debt
 
2014 Credit Agreement
 
In August 2014, the Company entered into an amended and restated credit agreement, or Asset-Based Credit Facility, with a borrowing limit of $180.0 million. The Asset-Based Credit Facility allowed the Company to borrow up to the lesser of (i) $180.0 million, including up to $50.0 million for the issuance of letters of credit and up to $25.0 million for swing line loans and (ii) the borrowing base then in effect less the amount then outstanding under letters of credit and loans. During the nine months ended September 30, 2015, the effective interest rate on the revolving line of credit was 4.25%. The Asset-Based Credit Facility was terminated in December 2015.
 
2014 Revolving Credit and Guarantee Agreement
 
In August 2014, the Company entered into a revolving credit and guarantee agreement, or Cash Flow Facility. In October 2014, the Company amended the Cash Flow Facility to increase the borrowing limit under the Cash Flow Facility. The Cash Flow Facility allowed the Company to borrow up to $50.0 million, including up to $10.0 million for the issuance of letters of credit and up to $10.0 million for swing line loans. During the nine months ended September 30, 2015, the effective interest rate on the revolving line of credit was 3.59%. The Cash Flow Facility was terminated in December 2015.
 
2015 Credit Agreement
 
In December 2015, the Company entered into a second amended and restated credit agreement, or Senior Facility, to replace the existing Asset-Based Credit Facility and Cash Flow Facility. This Senior Facility allows the Company to borrow up to $250.0 million, including up to $50.0 million for the issuance of letters of credit and up to $25.0 million for swing line loans. Borrowings under the Senior Facility may be drawn as Alternate Base Rate, or ABR, loans or Eurodollar loans, and mature in December 2020. ABR loans bear interest at a variable rate equal to the applicable margin plus the highest of (i) the prime rate, (ii) the federal funds effective rate plus 0.5%, and (iii) the Eurodollar rate plus 1.0%, but in any case at a minimum rate of 3.25% per annum. Eurodollar loans bear interest at a variable rate based on the LIBOR rate and Eurodollar reserve requirements, but in any case at a minimum rate of 1.0% per annum.
 
The Company has the option to repay its borrowings under the Senior Facility without penalty prior to maturity. The Senior Facility requires the Company to comply with certain financial covenants, including maintaining a consolidated fixed charge coverage ratio of at least 1.15:1, and a consolidated leverage ratio of less than 3:1. The Senior Facility also requires the Company to comply with certain non-financial covenants. The Senior Facility contains customary covenants that restrict the Company’s ability to, among other things, incur additional indebtedness, sell certain assets, guarantee certain obligations of third parties, declare dividends or make certain distributions, and undergo a merger or consolidation or certain other transactions. The Company was in compliance with these covenants as of October 1, 2016. Obligations under the Senior Facility are collateralized by substantially all of the Company’s assets, excluding the Company’s intellectual property. As of October 1, 2016, there were no outstanding borrowings under the Senior Facility.

Letters of Credit
 
As of October 1, 2016 and December 31, 2015, the Company had outstanding letters of credit totaling $37.9 million and $17.1 million, respectively, issued to cover various security deposits on the Company’s facility leases.
Commitments and Contingencies
Commitments and Contingencies
Commitments and Contingencies
 
Leases
 
The Company leases office space in various locations with expiration dates between 2016 and 2024. The lease agreements often include leasehold improvement incentives, escalating lease payments, renewal provisions and other provisions which require the Company to pay taxes, insurance, maintenance costs or defined rent increases. Rent expense is recorded over the lease terms on a straight-line basis. In April 2016, the Company entered into a sublease to expand the Company’s existing headquarters. The lease expires in 2024. Future minimum payments under the leases as of October 1, 2016 were $305.2 million.
 
Legal Proceedings
 
Fitbit Force. In 2014, class action and personal injury lawsuits were filed against the Company based upon claims of allergic reactions from adhesives in the Fitbit Force, and alleged violations of various state false advertising and unfair competition statutes based on the Company’s sale and marketing of the Fitbit Force. The class action cases were settled in 2014. Certain personal injury complaints were filed in 2015, and the settlement of those claims is almost final. In the fourth quarter of 2015, the Company received proceeds from the insurance policies that apply to these claims and related legal fees, and the Company recorded an accrual for liabilities arising under these claims that was immaterial and falls within the amount of the insurance proceeds received.

Fitbit Zip, Fitbit One, Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge. In 2014, one personal injury lawsuit was filed against the Company based upon claims of skin irritation from the Fitbit Flex. Additional lawsuits were filed in 2015 based upon claims of personal injury from the Fitbit Zip, Fitbit One, Fitbit Flex, Fitbit Charge, Fitbit Charge HR, and Fitbit Surge. Settlement of those claims is almost final. In the fourth quarter of 2015, the Company received proceeds from the insurance policies that apply to these claims and related legal fees, and the Company recorded an accrual for liabilities arising under these claims that was immaterial and falls within the amount of the insurance proceeds received.
 
Jawbone. On May 27, 2015, Aliphcom, Inc. d/b/a Jawbone, or Jawbone, filed a lawsuit in the Superior Court of California in the County of San Francisco against the Company and certain of its employees who were formerly employed by Jawbone, alleging trade secret misappropriation and unfair and unlawful business practices against all defendants, and alleging breach of contract and breach of implied covenant of good faith and fair dealing against the employee defendants. The complaint alleges, among other things, that prior to leaving Jawbone at various times in 2015, the employees downloaded Jawbone company documents and materials, including allegedly confidential and trade secret information, and that these employees are using such information in the development of the Company’s products. The complaint also alleges that the Company recruited those employees with the intent of using Jawbone’s proprietary information. The complaint seeks unspecified damages, including punitive damages and injunctive relief. On May 31, 2016, the Court granted a demurrer on the unfair business practices cause of action as to both the Company and the individual defendants. On June 23, 2016, Jawbone filed a Second Amended Complaint, adding an additional employee defendant and making additional allegations.

On June 10, 2015, Jawbone and BodyMedia, Inc., a wholly-owned subsidiary of Jawbone, or BodyMedia, filed a lawsuit against the Company in the U.S. District Court for the Northern District of California alleging that the Company infringes three U.S. patents held by them: U.S. Patent Nos. 8,446,275, 8,073,707, and 8,398,546. Jawbone and BodyMedia allege that these patents have been infringed by a substantial majority of the Company’s products.

On July 3, 2015, Jawbone and BodyMedia amended their complaint to add three additional U.S. patents to the infringement claims against the Company: U.S. Patent Nos. 8,529,811, 8,793,522, and 8,961,413. The complaint seeks unspecified compensatory damages and attorneys’ fees from the Company and to permanently enjoin the Company from making, manufacturing, using, selling, importing, or offering the Company’s products for sale. The lawsuit has been stayed pending the investigation in the ITC.

On July 7, 2015, Jawbone and BodyMedia filed a complaint with the ITC requesting an investigation into purported violations of the Tariff Act of 1930 by the Company and Flextronics International Ltd. and Flextronics Sales and Marketing (A-P) Ltd. The complaint alleges that the Company’s products infringe the same six U.S. patents at issue in action brought against the Company in federal court. The complaint makes the same allegations of trade secret misappropriation, unfair competition and unfair acts as a result of the Company’s hiring of the former Jawbone employees, as in the action brought against it and certain of the Company’s employees in the state case. The complaint seeks a limited exclusion order and a cease and desist order halting the importation and sale of the Company’s products that allegedly infringe upon Jawbone’s patents and misappropriate Jawbone’s trade secrets. The ITC instituted the investigation on August 17, 2015.

On February 8, 2016, Jawbone filed a motion for partial termination of the investigation as to the ‘522 patent after discovery showed the Company’s products do not actually practice the patent. On March 4, 2016, Jawbone filed a motion for partial termination of the investigation as to the ‘811 patent after a claim construction ruling that was favorable to the Company suggested non-infringement by the Company’s products. On March 4, 2016, the administrative law judge, or ALJ, issued an Initial Determination, or ID, that granted a Motion for Summary Determination as to the ‘546 and ‘275 patents on grounds they are ineligible subject matter under 35 U.S.C. § 101. The ID was affirmed by the ITC on April 4, 2016. On June 3, 2016, Jawbone filed a notice of appeal in the Federal Circuit. On April 28, 2016, the ALJ issued an ID that granted a Motion for Summary Determination as to the ‘707 and ‘413 patents on grounds they are ineligible subject matter under 35 U.S.C. § 101. The ID was affirmed by the ITC on June 2, 2016.

A trial on the trade secrets allegations took place from May 9 to May 17, 2016. On August 23, 2016, the ALJ issued an ID that concluded that the Company did not misappropriate any Jawbone trade secrets. On October 20, 2016, the ITC declined to review the ID, making it a Final Determination, and terminated the investigation in the ITC.

On September 3, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the District of Delaware, asserting that its activity trackers (UP Move, UP24, UP3, and UP4) infringe U.S. Patent Nos. 8,909,543, 9,031,812, and 9,042,971. On September 8, 2015, the Company filed a complaint for patent infringement against Jawbone in the U.S. District Court for the Northern District of California, asserting that its activity trackers infringe U.S. Patent Nos. 9,026,053, 9,084,923, and 9,106,307. On October 29, 2015, the Company filed a complaint for patent infringement against Jawbone in the United States District Court for the District of Delaware, asserting that its activity trackers infringe U.S. Patent Nos. 8,920,332, 8,868,377, and 9,089,760.

On November 2, 2015, the Company filed a complaint with the ITC requesting an investigation into violations of the Tariff Act of 1930 by Jawbone and Body Media. The complaint asserts that Jawbone’s products infringe U.S. Patent Nos. 8,920,332, 8,868,377, and 9,089,760. The complaint seeks a limited exclusion order and a cease and desist order halting the importation and sale of Jawbone’s products that the Company believes infringe upon its patents. The ITC instituted the investigation on December 1, 2015. On July 20, 2016, the ALJ issued an Initial Determination that granted a Motion for Summary Determination as to the ‘332, ‘377, and ‘760 patents on grounds they are ineligible subject matter under 35 U.S.C. § 101. As a result, the investigation was terminated and the August 4, 2016 trial date cancelled. On September 7, 2016, the ITC reviewed the Initial Determination and vacated the Initial Determination’s grant of summary determination as to the ‘332 and ‘377 patents. No new trial date has been scheduled.

The first case filed by the Company against Jawbone in the District of Delaware, as to the ’543, ’812, and ’971 patents, has been transferred to the Northern District of California. The second case filed by the Company against Jawbone in the District of Delaware, as to the ’332, ’377, and ’760 patents, has been stayed, pending a determination in the ITC on the same patents. In the case filed by the Company in the Northern District of California, on October 30, 2015, Jawbone answered and made an antitrust counterclaim, asserting that the Company’s infringement claims are somehow “sham litigation” and that by asserting these claims and hiring some of Jawbone’s employees, the Company is allegedly monopolizing a market of personal fitness trackers. In response to the Company’s motion to dismiss the antitrust counterclaim, on January 13, 2016, Jawbone amended its Answer and antitrust counterclaim. The Company moved to stay and bifurcate the antitrust claim, and on May 27, 2016, the Court granted the motion. On June 15, 2016, Jawbone filed a Motion for Summary Judgment, which the Company opposed. On July 12, 2016, Jawbone withdrew its motion.

The Company intends to vigorously defend and prosecute each of the Jawbone litigation matters and, based on its review, the Company believes it has valid defenses and claims with respect to each of these matters. However, litigation is inherently uncertain, and any judgment or injunctive relief entered against the Company or any adverse settlement could materially and adversely impact its business, financial condition, operating results, and prospects. Regarding the six matters still in the early stages of litigation, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from these matters. In addition, these litigation matters are complex, likely to involve significant management time and attention, and the cost of defending and prosecuting these matters is likely to be expensive, regardless of outcome.

Sleep Tracking. On May 8, 2015, a purported class action lawsuit was filed against the Company in the U.S. District Court for the Northern District of California, alleging that the sleep tracking function available in certain trackers does not perform as advertised. Plaintiffs seek class certification, restitution, an award of unspecified compensatory and punitive damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. Plaintiffs have amended their complaint four times, and on January 15, 2016, the Company moved to dismiss the Fourth Amended Complaint. On July 15, 2016, the Court denied the motion to dismiss. Trial is currently scheduled for May 30, 2017.

The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.

Heart Rate Tracking. On January 6, 2016 and February 16, 2016, two purported class action lawsuits were filed against the Company in the U.S. District for the Northern District of California, alleging that the PurePulse heart rate tracking technology in the Fitbit Charge HR and Fitbit Surge do not consistently and accurately record users’ heart rates. Plaintiffs allege common law claims as well as violations of various states’ false advertising and unfair competition statutes based on the Company’s sale and marketing of the Fitbit Charge HR and Fitbit Surge. Plaintiffs seek class certification, injunctive and declaratory relief, restitution, an award of unspecified compensatory damages, exemplary damages, punitive damages, and statutory penalties and damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. On April 15, 2016, the plaintiffs filed a Consolidated Master Class Action Complaint that combines the plaintiffs from the two previously filed complaints. On May 19, 2016, the plaintiffs filed an Amended Consolidated Master Class Action Complaint. Attached as an exhibit was a “study” commissioned by the plaintiffs and performed by two researchers at California State Polytechnic University, Pomona, which allegedly found that the Fitbit devices incorrectly measured heart rate by an average of 20 beats per minute during moderate to high exercise. The Company has not yet answered. On November 10, 2016, the parties have a hearing on whether the issue of arbitrability should be decided by the arbitrator.

The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.

Federal Securities Class Action. On January 11, 2016, a putative securities class action was filed in the U.S. District Court for the Northern District of California naming as defendants the Company and certain of its officers (the “Federal Securities Class Action”). On May 10, 2016, the Court appointed the Fitbit Investor Group (consisting of five individual investors) as lead plaintiff. The amended complaint, filed on July 1, 2016, names as defendants the Company, certain of its officers and directors, and certain financial institutions that acted as underwriters in connection with the Company’s June 2015 initial public offering, or IPO. Plaintiffs allege violations of the Securities Act of 1933, as amended, or the Securities Act, and the Securities Exchange Act of 1934, as amended, or the Exchange Act, based on alleged materially false and misleading statements about the Company’s products between October 27, 2014 and November 23, 2015. Plaintiffs seek to represent a class of persons who purchased or otherwise acquired the Company’s securities (i) on the open market between June 18, 2015 and May 19, 2016; and/or (ii) pursuant to or traceable to the IPO. Plaintiffs seek class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper. The Company filed a motion to dismiss the Amended Complaint on July 29, 2016. On October 26, 2016, the Court denied the motion to dismiss.

The Company believes that the plaintiffs’ allegations are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.

State Securities Class Action. On April 28, 2016, a putative class action lawsuit alleging violations of the Securities Act was filed in the Superior Court of California, County of San Mateo, naming as defendants the Company, certain of its officers, its board members, the underwriters for the IPO, and a number of its investors (the “San Mateo Action”). On May 23, 2016, the Court granted plaintiff’s request to voluntarily dismiss the investor defendants. Plaintiff alleges that the IPO registration statement contained material misstatements about the Company’s products. Plaintiff seeks to represent a class of persons who purchased Fitbit common stock in and/or traceable to the IPO. Plaintiff seeks class certification, an award of unspecified compensatory damages, an award of reasonable costs and expenses, including attorneys’ fees, and other further relief as the Court may deem just and proper.

On May 17, 2016, a shareholder class action lawsuit was filed in the Superior Court of California, County of San Francisco alleging claims similar to those at issue in the San Mateo Action and the Federal Securities Class Action (the “San Francisco Action”). The complaint alleges violations of the Securities Act based on alleged material misstatements in the registration statements for the IPO and November 2015 follow-on public offering and names as defendants the Company, certain of its officers and directors, the underwriters for the Company’s public offerings, and two of the Company’s investors. Plaintiff seeks to represent a class of persons who acquired Fitbit common stock pursuant and/or traceable to the IPO and follow-on public offering.

The Company removed both the San Mateo Action and the San Francisco Action to the U.S. District Court for the Northern District of California. On July 27, 2016, the District Court remanded the actions back to state court. Defendants have not yet answered. On September 19, 2016, the San Mateo Action was transferred to the Superior Court of California, County of San Francisco.

The Company believes that the plaintiffs’ allegations in these actions are without merit, and intends to vigorously defend against the claims. Because the Company is in the early stages of this litigation matter, the Company is unable to estimate a reasonably possible loss or range of loss, if any, that may result from this matter.
 
Other. The Company is and, from time to time, may in the future become, involved in other legal proceedings in the ordinary course of business. The Company currently believes that the outcome of any of these existing legal proceedings, including the aforementioned cases, either individually or in the aggregate, will not have a material impact on the operating results, financial condition or cash flows of the Company. With respect to existing legal proceedings, the Company has either determined that the existence of a material loss is not reasonably possible or that it is unable to estimate a reasonably possible loss or range of loss. The Company may incur substantial legal fees, which are expensed as incurred, in defending against these legal proceedings.

Indemnifications
 
In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. Pursuant to such agreements, the Company may indemnify, hold harmless and defend an indemnified party for losses suffered or incurred by the indemnified party. Some of the provisions will limit losses to those arising from third-party actions. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments the Company could be required to make under these provisions is not determinable. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company has also entered into indemnification agreements with its directors and officers that may require the Company to indemnify its directors and officers against liabilities that may arise by reason of their status or service as directors or officers to the fullest extent permitted by Delaware corporate law. The Company also currently has directors’ and officers’ insurance.
Stock Plan
Stock Plan
Stock Plan
 
Equity Incentive Plans

In May 2015, the Company’s board of directors and stockholders adopted and approved the 2015 Equity Incentive Plan, or 2015 Plan. The 2015 Plan became effective on June 16, 2015 and serves as the successor to the Amended and Restated 2007 Stock Plan, or 2007 Plan. The Company ceased granting awards under the 2007 Plan, and any outstanding stock options and restricted stock units, or RSUs, granted under the 2007 Plan will remain subject to the terms of the 2007 Plan. As of October 1, 2016, 7.6 million shares of Class A common stock were reserved and available for future issuance under the 2015 Plan.

Employee Stock Purchase Plan

In May 2015, the Company’s board of directors adopted the 2015 Employee Stock Purchase Plan, or 2015 ESPP, which became effective on June 17, 2015. A total of 3.8 million shares of Class A common stock were initially reserved for issuance under the 2015 ESPP. The 2015 ESPP allows eligible employees to purchase shares of the Company’s Class A common stock through payroll deductions at a price per share equal to 85% of the lesser of the fair market value of the Company’s Class A common stock (i) on the first trading day of the applicable offering period and (2) the last trading day of each purchase period in the applicable offering period. Except for the initial offering period, the 2015 ESPP provides for 6-month offering periods beginning in May and November of each year. The initial offering period began June 17, 2015 and ended in May 2016.

Stock Options
 
Stock option activity under the equity incentive plans was as follows:
 
Stock Options Outstanding
 
Number of
Shares Subject
to
Stock Options
 
Weighted–
Average
Exercise
Price
 
Aggregate
Intrinsic
Value
 
(in thousands)
 
 
 
(in thousands)
Balance—December 31, 2015
44,362

 
$
3.20

 


Granted
955

 
$
14.06

 
 
Exercised
(7,537
)
 
$
1.14

 


Forfeited or canceled
(1,971
)
 
$
5.38

 
 
Balance—October 1, 2016
35,809

 
$
3.80

 
$
399,272

 
 
 
 
 
 
Stock options exercisable—October 1, 2016
20,163

 
$
2.32

 
$
253,846

Stock options vested and expected to vest—October 1, 2016
35,334

 
$
3.77

 
$
395,144


 
The aggregate intrinsic values of stock options outstanding, exercisable, vested and expected to vest as of October 1, 2016 were calculated as the difference between the exercise price of the stock options and the fair value of the Class A common stock of $14.84 as of September 30, 2016.
 
Restricted Stock Units
 
RSU activity under the equity incentive plans was as follows:
 
RSUs
Outstanding
 
Weighted-
Average
Grant Date
Fair Value
 
(in thousands)
 
 
Unvested balance—December 31, 2015
3,292

 
$
34.27

Granted
8,582

 
14.33

Vested
(632
)
 
32.77

Forfeited or canceled
(550
)
 
23.62

Unvested balance—October 1, 2016
10,692

 
18.91


 
Stock-Based Compensation Expense
 
Total stock-based compensation expense recognized was as follows (in thousands):
 
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
 
 
 
 
 
 
 
 
Cost of revenue
$
1,014

 
$
1,351

 
$
3,407

 
$
2,622

Research and development
12,314

 
5,893

 
34,432

 
10,910

Sales and marketing
3,030

 
2,451

 
8,492

 
5,080

General and administrative
3,647

 
3,339

 
11,844

 
7,072

Total stock-based compensation expense
$
20,005

 
$
13,034

 
$
58,175

 
$
25,684


 
As of October 1, 2016, the total unrecognized stock-based compensation expense related to unvested stock options and RSUs, net of estimated forfeitures, was $226.4 million, which the Company expects to recognize over an estimated weighted average period of 3.1 years.
Income Taxes
Income Taxes
Income Taxes
  
The Company is subject to income tax in the United States as well as other tax jurisdictions in which it conducts business. Earnings from non-U.S. activities are subject to local country income tax. The Company does not provide for federal income taxes on the undistributed earnings of its foreign subsidiaries as such earnings are to be reinvested indefinitely.

For the three and nine months ended October 1, 2016, the Company recorded an expense for income taxes of $18.3 million and $31.9 million, respectively, for an effective tax rate of 41.2% and 42.3%, respectively. The effective tax rate for the nine months ended October 1, 2016 is higher than the statutory federal tax rate primarily due to the effect of an out-of-period adjustment recorded in the three months ended April 2, 2016, the mix of income between U.S. and foreign jurisdictions, unrecognized tax benefits, and a permanent domestic production activities deduction. For the three and nine months ended September 30, 2015, the Company recorded an expense for income taxes of $20.5 million and $66.0 million, respectively, for an effective tax rate of 30.9% and 37.2%, respectively. The effective tax rate for the nine months ended September 30, 2015 was higher than the statutory federal tax rate primarily due to certain permanent differences related to the change in fair value of the redeemable convertible preferred stock warrant liability and non-deductible stock-based compensation expense, partially offset by non-taxable income associated with contingent consideration from the FitStar acquisition and a permanent domestic production activities deduction.
Net Income per Share Attributable to Common Stockholders
Net Income per Share Attributable to Common Stockholders
Net Income per Share Attributable to Common Stockholders
 
Basic and diluted net income per share attributable to common stockholders is presented in conformity with the two-class method required for participating securities. Prior to the Company’s IPO in June 2015, the Company considered its redeemable convertible preferred stock to be participating securities. In accordance with the two-class method, earnings allocated to these participating securities and the related number of outstanding shares of the participating securities, which include contractual participation rights in undistributed earnings, have been excluded from the computation of basic and diluted net income per share attributable to common stockholders.

In connection with the IPO, the Company established two classes of authorized common stock: Class A common stock and Class B common stock. As a result, all then-outstanding shares of common stock were converted into shares of Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except with respect to voting and conversion. Each share of Class A common stock is entitled to one vote per share and each share of Class B common stock is entitled to ten votes per share. Each share of Class B common stock is convertible at any time at the option of the stockholder into one share of Class A common stock, generally automatically converts into Class A common stock upon a transfer, and has no expiration date. The Company applies the two-class method of calculating earnings per share, or EPS, but as the dividend rights of both classes are identical, basic and diluted earnings per share are the same for both classes.

Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. Basic net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. All participating securities are excluded from basic weighted-average common shares outstanding.

For the calculation of diluted EPS, net income attributable to common stockholders for basic EPS is adjusted by the effect of dilutive securities. Diluted net income per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding, including all potentially dilutive common shares, if the effect of such shares is dilutive.

The following table sets forth the computation of the Company’s basic and diluted net income per share attributable to common stockholders (in thousands, except per share amounts):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
Numerator:
 
 
 
 
 
 
 
Net income
$
26,120

 
$
45,834

 
$
43,496

 
$
111,512

Less: noncumulative dividends to preferred stockholders

 

 

 
(2,526
)
Less: undistributed earnings to participating securities

 

 

 
(50,316
)
Net income attributable to common stockholders—basic
26,120

 
45,834

 
43,496

 
58,670

Add: adjustments to undistributed earnings to participating securities

 

 

 
7,655

Net income attributable to common stockholders—diluted
$
26,120

 
$
45,834

 
$
43,496

 
$
66,325

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Weighted-average shares of common stock—basic for Class A and Class B
222,412

 
206,657

 
219,079

 
102,741

Effect of dilutive securities
21,275

 
37,003

 
23,573

 
34,244

Weighted-average shares of common stock—diluted for Class A and Class B
243,687

 
243,660

 
242,652

 
136,985

Net income per share attributable to common stockholders:
 
 
 
 
 
 
 
Basic
$
0.12

 
$
0.22

 
$
0.20

 
$
0.57

Diluted
$
0.11

 
$
0.19

 
$
0.18

 
$
0.48



The following potentially dilutive common shares were excluded from the computation of diluted net income per share for the periods presented because including them would have been anti-dilutive (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
 
 
 
 
 
 
 
 
Stock options to purchase common stock
3,553

 
88

 
3,549

 
562

Restricted stock units
3,063

 
921

 
3,611

 
307

Redeemable convertible preferred stock

 

 

 
88,112

Redeemable convertible preferred stock warrants

 

 

 
1,231

Total
6,616

 
1,009

 
7,160

 
90,212

Significant Customer Information and Other Information
Significant Customer Information and Other Information
Significant Customer Information and Other Information
 
Retailer and Distributor Concentration
 
Retailers and distributors with revenue equal to or greater than 10% of total revenue for the three and nine months ended October 1, 2016 and September 30, 2015 were as follows:
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
 
 
 
 
 
 
 
 
A
10
%
 
14
%
 
15
%
 
15
%
C
14

 
12

 
14

 
12

B
13

 
11

 
12

 
12


Retailers and distributors that accounted for equal to or greater than 10% of accounts receivable at October 1, 2016 and December 31, 2015 were as follows:
 
October 1,
2016
 
December 31,
2015
 
 
 
 
 
 
A
21
%
 
15
%
B
15

 
19

C
15

 
23

 
 
Geographic and Other Information
 
Revenue by geographic region, based on ship-to destinations, was as follows (in thousands):
 
Three Months Ended
 
Nine Months Ended
 
October 1, 2016
 
September 30, 2015
 
October 1, 2016
 
September 30, 2015
 
 
 
 
 
 
 
 
United States
$
361,239

 
$
270,814

 
$
1,158,116

 
$
848,789

Americas excluding United States
25,939

 
24,180

 
76,708

 
54,408

Europe, Middle East, and Africa
80,932

 
49,214

 
255,127

 
123,981

APAC
35,692

 
65,054

 
105,735

 
119,250

Total
$
503,802

 
$
409,262

 
$
1,595,686

 
$
1,146,428


 
As of October 1, 2016 and December 31, 2015, long-lived assets, which represent property and equipment, located outside the United States were $53.0 million and $28.9 million, respectively.
Acquisitions
Acquisitions
Acquisitions

2016 Acquisition

In May 2016, the Company completed a purchase of certain assets from a privately-held company, which was accounted for as a business combination, for total cash consideration of $7.0 million, of which $3.9 million was allocated to in-process research and development intangible assets, and $3.1 million to goodwill. This acquisition was not material to the Company’s condensed consolidated financial statements.

FitStar Acquisition — 2015

In March 2015, the Company acquired all of the outstanding securities of FitStar, a privately-held company, for aggregate acquisition consideration of $32.5 million, comprised of $13.3 million related to the issuance of 1,059,688 shares of the Company’s Class B common stock, $11.5 million of cash, and $7.7 million of contingent consideration. FitStar is a provider of interactive video-based exercise experiences on mobile devices and computers that utilize proprietary algorithms to adjust and customize workouts for individual users. The acquisition is expected to enhance the Company’s software and services offerings.

Under the acquisition agreement, the Company was obligated to issue additional common stock or pay cash to FitStar stockholders. The actual amount of any contingent consideration depended on market-based events that may occur in the future. The Company determined the fair market value of this contingent consideration to be $7.7 million as of the acquisition date using the Monte Carlo simulation method. The fair value of this liability was adjusted at each reporting period, and the change in fair value is included in total operating expenses on the condensed consolidated statements of operations. As a result of the Company’s IPO, the Company recorded a change in fair value of $7.7 million as a benefit and as of December 31, 2015, the fair value of the contingent consideration liability was zero. In addition, the terms related to the contingent consideration expired as of December 31, 2015 and no amounts were paid or shares issued for the contingent consideration.

The following table summarizes the fair value of assets acquired and liabilities assumed (in thousands):
 
 
Goodwill
$
22,157

Developed and core technology
12,640

Customer relationships
128

Trademarks
1,150

Assumed liabilities, net of assets
(3,552
)
Total
$
32,523



The amortization periods of the acquired developed technology, customer relationships, and trademarks are 7.0 years, 1.3 years, and 5.0 years, respectively. Goodwill is not deductible for tax purposes.

In addition, upon acquisition, the Company issued 308,216 additional shares of common stock valued at $4.2 million. The Company is also obligated to make cash payments up to $1.2 million. Both the common stock and the cash payments are additional consideration which is contingent upon former employees of FitStar continuing to be employed by the Company. As such, this additional consideration was not part of the purchase price and is recognized as post-acquisition compensation expense over the related requisite service period of three years. The Company also recorded acquisition-related transaction costs of $0.3 million, which were included in general and administrative expenses in the condensed consolidated statements of operations during the nine months ended September 30, 2015.

The results of operations for both acquired companies are included in the accompanying condensed consolidated statements of operations from the date of acquisition. Pro forma and historical results of operations for both acquired companies have not been presented because they are not material, either individually or in the aggregate, to the Company’s condensed consolidated financial statements.
Basis of Presentation and Summary of Significant Accounting Policies (Policies)
The accompanying condensed consolidated financial statements are unaudited. The condensed consolidated balance sheet at December 31, 2015 has been derived from the audited financial statements of the Company. The accompanying condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP, for interim financial information, and in management’s opinion, includes all adjustments, consisting of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position, its results of operations, and cash flows for the interim periods presented. The results of operations for the three and nine months ended October 1, 2016 are not necessarily indicative of the results to be expected for the full fiscal year or any other period.

The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed with the Securities and Exchange Commission on February 29, 2016. There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K.

The Company’s fiscal year ends on December 31 of each year. In the first quarter of 2016, the Company adopted a 4-4-5 week quarterly calendar, which, for the 2016 fiscal year, is comprised of four fiscal quarters ending on April 2, 2016, July 2, 2016, October 1, 2016, and December 31, 2016. The Company did not adjust operating results for quarters prior to 2016. There were 91 and 92 days in the three months ended October 1, 2016 and September 30, 2015, respectively, and 275 and 273 days in the nine months ended October 1, 2016 and September 30, 2015, respectively.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.
Use of Estimates
 
The preparation of condensed consolidated financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the condensed consolidated financial statements and accompanying notes. The primary estimates and assumptions made by management related to revenue recognition, reserves for sales returns and incentives, reserves for warranty, valuation of stock options, fair value of derivative assets and liabilities, allowance for doubtful accounts, inventory valuation, accruals for the Fitbit Force recall, fair value of goodwill and acquired tangible and intangible assets and liabilities assumed during acquisitions, the number of reporting segments, the recoverability of intangible assets and their useful lives, contingencies, and the valuations of deferred income tax assets and uncertain tax positions. Actual results could differ from those estimates, and such differences may be material to the condensed consolidated financial statements.
Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU 2014-09 (ASC 606), Revenue from Contracts with Customers, which affects any entity that either enters into contracts with customers to transfer goods and services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the currently effective guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU 2014-09 will become effective for the Company on January 1, 2018 and can be adopted either retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. In April 2016, the FASB issued ASU 2016-10, which clarifies guidance on identifying performance obligations and licensing implementation. The Company is currently evaluating the impact of this guidance on its consolidated financial statements and has not yet selected a transition method.

In February 2016, the FASB issued ASU 2016-02, Leases. This ASU requires lease assets and lease liabilities arising from leases, including operating leases, to be recognized on the balance sheet. ASU 2016-02 will become effective for the Company on January 1, 2019, and requires adoption using a modified retrospective approach. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In March 2016, the FASB issued ASU 2016-09, Compensation — Stock Compensation (Topic 718). This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 will become effective for the Company on January 1, 2017 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU provides for a new impairment model which requires measurement and recognition of expected credit losses for most financial assets and certain other instruments. ASU 2016-13 will become effective for the Company on January 1, 2020 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This ASU provides guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 will become effective for the Company on January 1, 2018 and early adoption is permitted. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
Fair Value Measurements (Tables)
Schedule of fair value of assets and liabilities measured on recurring basis
The following tables set forth the Company’s financial instruments that were measured at fair value on a recurring basis by level within the fair value hierarchy (in thousands):
 
 
October 1, 2016
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
97,719

 
$

 
$
97,719

U.S. government agencies

 
86,748

 
86,748

Corporate debt securities

 
321,872

 
321,872

Derivative assets

 
6,882

 
6,882

Total
$
97,719

 
$
415,502

 
$
513,221

Liabilities:
 
 
 
 
 
Derivative liabilities
$

 
$
3,535

 
$
3,535

 
 
December 31, 2015
 
Level 1
 
Level 2
 
Total
Assets:
 
 
 
 
 
Money market funds
$
248,128

 
$

 
$
248,128

U.S. government agencies

 
113,314

 
113,314

Corporate debt securities

 
193,964

 
193,964

Derivative assets

 
6,002

 
6,002

Total
$
248,128

 
$
313,280

 
$
561,408

Liabilities:
 
 
 
 
 
Derivative liabilities
$

 
$
2,640

 
$
2,640

Financial Instruments (Tables)
The following table classifies marketable securities by contractual maturities (in thousands):
 
October 1, 2016
 
December 31, 2015
 
 
Due in one year
$
362,322

 
$
128,632

Due in one to two years
25,560

 

Total
$
387,882

 
$
128,632

The following table sets forth cash, cash equivalents, and marketable securities as of October 1, 2016 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
165,763

 
$

 
$

 
$
165,763

 
$
165,763

 
$

Money market funds
97,719

 

 

 
97,719

 
97,719

 

U.S. government agencies
86,691

 
58

 
(1
)
 
86,748

 

 
86,748

Corporate debt securities
322,021

 
5

 
(154
)
 
321,872

 
20,738

 
301,134

Total
$
672,194

 
$
63

 
$
(155
)
 
$
672,102

 
$
284,220

 
$
387,882






The following table sets forth cash, cash equivalents, and marketable securities as of December 31, 2015 (in thousands):
 
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Cash and Cash Equivalents
 
Marketable Securities
Cash
$
109,072

 
$

 
$

 
$
109,072

 
$
109,072

 
$

Money market funds
248,128