SONOS, INC. You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this Annual Report on Form 10-K, particularly in the section titled "Risk Factors." We operate on a 52-week or 53-week fiscal year ending on the Saturday nearestSeptember 30 each year. Our fiscal year is divided into four quarters of 13 weeks, each beginning on a Sunday and containing two 4-week periods followed by a 5-week period. An additional week is included in the fourth fiscal quarter approximately every five years to realign fiscal quarters with calendar quarters. References to fiscal 2021 are to our 52-week fiscal year endedOctober 2, 2021 , references to fiscal 2020 are to our 53-week fiscal year endedOctober 3, 2020 , and references to fiscal 2019 are to our 52-week fiscal year endedSeptember 28, 2019 . Overview Sonos is one of the world's leading sound experience brands. As the inventor of multi-room wireless audio products, Sonos' innovation helps the world listen better by giving people access to the content they love and allowing them to control it however they choose. Known for delivering an unparalleled sound experience, thoughtful design aesthetic, simplicity of use and an open platform, Sonos makes a breadth of audio content available to anyone. Our sound system provides an immersive listening experience created by our thoughtfully designed speakers and components, our proprietary software platform and the ability to wirelessly stream the content our customers love from the services they prefer. We manage the complexity of delivering a seamless customer experience in a multi-user and open-platform environment. The Sonos sound system is easy to set up, use and expand to bring audio to any room in the home. Through our software platform, we frequently enhance features and services on our products, improving functionality and customer experience. Our innovative products, seamless customer experience and expanding global footprint have driven 16 consecutive years of sustained revenue growth since our first product launch. We generate revenue from the sale of our Sonos speaker products, including wireless speakers and home theater speakers, from our Sonos system products, which is largely comprised of our component products, and from partner products and other revenue, including partnerships withIKEA and Sonance, Sonos and third-party accessories, licensing, and advertising revenue. We have developed a robust product and software roadmap that we believe will help us capture the expanding addressable market for our products. We believe executing on our roadmap will position us to acquire new customers, offer a continuously improving experience to our existing customers, and grow follow-on purchases. COVID-19 Update InDecember 2019 , the novel coronavirus (COVID-19) was reported inChina and subsequently was declared a global pandemic inMarch 2020 by theWorld Health Organization . The impact of the pandemic has led to significant challenges to our global economy. Starting inMarch 2020 , we implemented global travel restrictions and work-from-home policies for employeeswho have the ability to work remotely and we continued to operate with these policies through fiscal 2021. As of the date of this report, these policies have not materially adversely affected our operations, financial reporting or internal controls. For part of the pandemic, against a backdrop of generally increasing demand, we experienced weakened retail demand due to store closures, modifications of the retail experience, and inventory re-balancing by retail partners. More recently, as retail stores have re-opened and restrictions have eased in more end-markets, we have seen a corresponding return of retail demand. COVID-19 has also affected our supply chain, consistent with its effect across many industries, including causing shipping and logistics challenges, and placing significant limits on component supplies. Especially when combined with the increased demand for our products, these supply chain impacts have resulted in delayed product availability. During our fourth quarter of fiscal 2021, we experienced increased component costs and increased shipping and logistics costs related to 31 -------------------------------------------------------------------------------- Table of contents these broader industry-wide supply chain challenges. The pandemic has also delayed our efforts to fully diversify our supply chain intoMalaysia until fiscal 2022. We expect these impacts, including potential delayed product availability, to continue for as long as the global supply chain is experiencing these challenges. We continue to invest in supply chain initiatives to meet increasing customer demand and address industry-wide capacity challenges. We continue to maintain our liquidity and believe our existing cash and cash equivalent balances, cash flow from operations, and committed credit lines are sufficient to meet our long-term working capital and capital expenditure needs. While the situation caused by COVID-19 is unprecedented and dynamic, we have considered its impact when developing our estimates and assumptions. Actual results and outcomes may differ from our estimates and assumptions. For additional information of risks related to COVID-19, refer to Part I, Item 1A. Risk factors. Key Metrics In addition to the measures presented in our consolidated financial statements, we use the following key metrics to evaluate our business, measure our performance, identify trends affecting our business and assist us in making strategic decisions. Our key metrics are total revenue, products sold, adjusted EBITDA and adjusted EBITDA margin. The most directly comparable financial measure calculated underU.S. GAAP for adjusted EBITDA is net income (loss). In the fiscal years endedOctober 2, 2021 ,October 3, 2020 , andSeptember 28, 2019 , we had a net income of$158.6 million , a net loss of$20.1 million , and$4.8 million , respectively. Fiscal Year Ended October 2, October 3, September 28, 2021 2020 2019 (In thousands, except percentages) Revenue$ 1,716,744 $ 1,326,328 $ 1,260,823 Products sold 6,503 5,806 6,204 Adjusted EBITDA(1)$ 278,585 $ 108,543 $ 88,689 Adjusted EBITDA margin(1) 16.2 % 8.2 % 7.0 % (1)For additional information regarding adjusted EBITDA and adjusted EBITDA margin (which are non-GAAP financial measures), including reconciliations of net income (loss), to adjusted EBITDA, see the sections titled "Adjusted EBITDA and Adjusted EBITDA Margin" and "Non-GAAP Financial Measures" below.
Revenue
We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from Partner products and other revenue sources, such as module revenue from ourIKEA partnership, architectural speakers from our Sonance partnership, accessories such as speaker stands and wall mounts, professional services, licensing, and advertising revenue. For a description of our revenue recognition policies, see the section titled "Critical accounting policies and estimates." Products Sold Products sold represents the number of products that are sold during a period, net of returns and includes the sale of products in the Sonos speakers and Sonos system products categories, as well as module units sold through our partnerships withIKEA and Sonance from our Partner products and other revenue category. Growth rates between products sold and revenue are not perfectly correlated because our revenue is affected by other variables, such as the mix of products sold during the period, promotional discount activity, the introduction of new products that may have higher or lower than average selling prices, as well as the impact of recognition of previously deferred revenue. 32 -------------------------------------------------------------------------------- Table of contents Adjusted EBITDA and Adjusted EBITDA Margin We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of stock-based compensation expense, depreciation, interest, other income (expense), taxes, and other items that we do not consider representative of our underlying operating performance. We define adjusted EBITDA margin as adjusted EBITDA divided by revenue. See the section titled "Results of Operations -Non-GAAP Financial Measures" for information regarding our use of adjusted EBITDA and adjusted EBITDA margin, and a reconciliation of net income (loss) to adjusted EBITDA.
Factors Affecting Performance
New Product Introductions. Since 2005, we have released a number of products in
multiple audio categories. We intend to introduce new products that appeal to a
broad set of consumers, as well as bring our differentiated listening platform
and experience to all the places and spaces where our customers listen to the
breadth of audio content available, including inside and outside their homes.
Seasonality. Historically, we have typically experienced the highest levels of
revenue in the first fiscal quarter of the year coinciding with the holiday
shopping season and our promotional activities. Our promotional discounting
activity is typically higher in the first fiscal quarter as well, which
negatively impacts gross margin during this period. However, our higher sales
volume in the holiday shopping season has historically resulted in a higher
operating margin in the first fiscal quarter due to positive operating leverage.
Ability to Sell Additional Products to Existing Customers. As our customers add
Sonos to their homes and listen to more audio content, they typically increase
the number of our products in their homes. In fiscal 2021, follow-on purchases
represented approximately 46% of new product registrations. As we execute on our
product roadmap to address evolving consumer preferences, we believe we can
expand the number of products in our customers' homes. Our ability to sell
additional products to existing customers is a key part of our business model,
as follow-on purchases indicate high customer engagement and satisfaction,
decrease the likelihood of competitive substitution and result in higher
customer lifetime value. We will continue to innovate and invest in product
development in order to enhance customer experience and drive sales of
additional products to existing customers.
Expansion of Partner Ecosystem. Expanding and maintaining strong relationships
with our partners will remain important to our success. Our ability to develop,
manufacture and sell voice-enabled speakers that deliver differentiated consumer
experiences will be a critical driver of our future performance, particularly as
we compete in a larger market with an expanding number of competitors. We
currently compete with, and will continue to compete with, companies that have
greater resources than we do, many of which have already brought voice-enabled
speakers to market. To date, our agreements with these partners have all been on
a royalty-free basis. We believe our partner ecosystem improves customer
experience, attracting more customers to Sonos, which in turn attracts more
partners to the platform further enhancing customer experience. We believe
partners choose to be part of the Sonos platform because it provides access to a
large, engaged customer base on a global scale. We look to partner with a wide
variety of streaming music services, voice assistants, connected home
integrators, content creators and podcast providers. We are also partnering with
certain companies in the development of our own voice-enabled products. Our
competitiveness in the voice-enabled speaker market will depend on successful
investment in research and development, market acceptance of our products and
our ability to maintain and benefit from these technology partnerships.
As competition increases, we believe our ability to give users the freedom to
choose across the broadest set of streaming services and voice control partners
will be a key differentiating factor.
Channel Strategy. We are focused on reaching and converting prospective
customers through third-party retail stores, e-commerce retailers, custom
installers of home audio systems, and our website sonos.com. We are investing in
our e-commerce capabilities and in-app experience to drive direct sales. Sales
through our direct-to-consumer channel, primarily through sonos.com, increased
46.5% and represented 24.2% of our revenue in fiscal 2021. We believe the growth
of our own e-commerce channel will continue to be important to supporting our
overall growth and profitability as consumers continue the shift from physical
to online sales channels. Our physical retail distribution relies on third-party
retailers and our ability to maintain our diversified manufacturing footprint
and base of component suppliers. While we seek to increase sales through our
direct-to-consumer sales channel, we expect that our partnerships with
third-party retailers and custom installers will continue to be an important
part of our ecosystem. We will continue to seek retail partners that can deliver
differentiated in-
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store experiences to support customer demand for product demonstrations.
Additionally, we intend to expand and strengthen our partnerships with custom
installers who are valuable to our customer base and contribute to our new
household growth.
International Expansion. Our products are sold in over 50 countries and in
fiscal 2021, 48.1% of our revenue was generated outside the United States . Our
international growth will depend on our ability to generate sales from the
global population of consumers, develop international distribution channels and
diversify our partner ecosystem to appeal to a more global audience. We are
committed to strengthening our brand in global markets and our future success
will depend in part on our growth in international markets.
Investing in Product and Software Development. Our investments in product and
software development consist primarily of expenses in personnel who support our
research and development efforts and capital expenditures for new tooling and
production line equipment to manufacture and test our products. We believe that
our financial performance will significantly depend on the effectiveness of our
investments to design and introduce innovative new products and services and
enhance existing products and software. If we fail to innovate and expand our
product and software offerings or fail to maintain high standards of quality in
our products, our brand, market position and revenue will be adversely affected.
Further, if our development efforts are not successful, we will not recover the
investments made.
Investing in Sales and Marketing. We intend to invest resources in our marketing
and brand development efforts. Our marketing investments are focused on
increasing brand awareness through advertising, public relations and brand
promotion activities. While we maintain a base level of investment throughout
the year, significant increases in spending are highly correlated with the
holiday shopping season, new product launches and software introductions. We
also invest in capital expenditures on product displays to support our retail
channel partners. Sales and marketing investments are typically incurred in
advance of any revenue benefits from these activities.
Components of Results of Operations
Revenue
We generate substantially all of our revenue from the sale of Sonos speakers and Sonos system products. We also generate a portion of revenue from Partner products and other revenue sources, such as module revenue from ourIKEA partnership, architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services, licensing, advertising, and subscription revenue. We attribute revenue from ourIKEA partnership to ourAsia Pacific ("APAC") region, as our regional revenue is defined by the shipment location. Our revenue is recognized net of allowances for returns, discounts, sales incentives, and any taxes collected from customers. We also defer a portion of our revenue that is allocated to unspecified software upgrades and cloud-based services, as well as for newly launched products sold to resellers not recognized until the date of general availability is reached. Our revenue is subject to fluctuation based on the foreign currency in which our products are sold, principally for sales denominated in the euro and the British pound. The introduction of new products may result in an increase in revenue but may also impact revenue generated from existing products as consumers shift purchases to new products. For a description of our revenue recognition policies, see the section titled "Critical accounting policies and estimates." Cost of Revenue Cost of revenue consists of product costs, including costs of our contract manufacturers for production, component product costs, shipping and handling costs, tariffs, duty costs, warranty replacement costs, packaging, fulfillment costs, manufacturing and tooling equipment depreciation, warehousing costs, hosting costs, and excess and obsolete inventory write-downs. In addition, we allocate certain costs related to management and facilities, personnel-related expenses, and other expenses associated with supply chain logistics. Personnel-related expenses consist of salaries, bonuses, benefits, and stock-based compensation expenses. Gross Profit and Gross Margin Our gross margin has fluctuated and may, in the future, fluctuate from period to period based on a number of factors, including the mix of products we sell, the channel mix through which we sell our products, fluctuations of the impacts of our product and material cost saving initiatives, the foreign currency in which our products are sold, and tariffs and duty costs implemented by governmental authorities. 34
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Operating Expenses Operating expenses consist of research and development, sales and marketing, and general and administrative expenses. Research and development. Research and development expenses consist primarily of personnel-related expenses, consulting and contractor expenses, tooling, test equipment, prototype materials, and related overhead costs. To date, software development costs have been expensed as incurred because the period between achieving technological feasibility and the release of the software has been short and development costs qualifying for capitalization have been insignificant. Sales and marketing. Sales and marketing expenses consist primarily of advertising and marketing activity for our products and personnel-related expenses, as well as trade show and event costs, sponsorship costs, consulting and contractor expenses, travel costs, product display expenses and related depreciation, customer experience and technology support tool expenses, revenue related sales fees from our direct-to-consumer business, and overhead costs.
General and administrative. General and administrative expenses consist of personnel-related expenses for our finance, legal, human resources and administrative personnel, as well as the costs of professional services, information technology, litigation, patents, related overhead, and other administrative expenses.
Other Income (Expense), Net Interest income. Interest income consists primarily of interest income earned on our cash and cash equivalents balances.
Interest expense. Interest expense consists primarily of interest expense associated with our debt financing arrangements and amortization of debt issuance costs.
Other income (expense), net. Other income (expense), net consists primarily of our foreign currency exchange gains and losses relating to transactions and remeasurement of asset and liability balances denominated in currencies other than theU.S. dollar. We expect our foreign currency gains and losses to continue to fluctuate in the future due to changes in foreign currency exchange rates. Provision for (Benefit From) Income Taxes We are subject to income taxes inthe United States and foreign jurisdictions in which we operate. Foreign jurisdictions have statutory tax rates different from those inthe United States . Accordingly, our effective tax rate will vary depending on jurisdictional mix of earnings, and changes in tax laws. In addition, certainU.S. tax regulations subject the earnings of our non-U.S. subsidiaries to current taxation inthe United States . Our effective tax rate will be impacted by our ability to claim deductions and foreign tax credits to offset the taxation of foreign earnings inthe United States . Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided to reduce our deferred tax assets to amounts that are more-likely-than-not to be realized. We have assessed, on a jurisdictional basis, the available means of recovering deferred tax assets, including the ability to carry back net operating losses, the existence of taxable temporary differences, the availability of tax planning strategies and available sources of future taxable income. We have concluded that future taxable income can be considered a source of income to realize a benefit for deferred tax assets in certain foreign jurisdictions. In addition, we have concluded that a valuation allowance on deferred tax assets in theU.S. and certain foreign jurisdictions continues to be appropriate considering cumulative pre-tax losses in recent years and uncertainty with respect to future taxable income. During the year endedOctober 2, 2021 , we determined that the net deferred tax asset of ourNetherlands subsidiary was more-likely-than-not realizable and released a valuation allowance of$7.8 million resulting in an income tax benefit. We determined that the positive evidence, principally ourNetherlands subsidiary being in a cumulative taxable income position with forecasts of future taxable income, outweighed the negative evidence, resulting in the valuation allowance release. It is possible that within the next 12 months there may be sufficient positive evidence to release a portion or all of the remaining valuation allowance. Release of the remaining valuation allowance would result in a benefit to income tax expense for the period the release is recorded, which could have a material impact on net earnings. The timing and amount of the potential valuation allowance release are subject to significant management judgment, as well as prospective earnings inthe United States and certain other foreign entities and jurisdictions. 35 -------------------------------------------------------------------------------- Table of contents Results of Operations The consolidated statements of operations data for fiscal years 2021, 2020, and 2019, and the consolidated balance sheet data as ofOctober 2, 2021 , andOctober 3, 2020 , are derived from our audited consolidated financial statements appearing in Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K. The consolidated statements of operations data for fiscal years 2018, and 2017, and the consolidated balance sheet data as ofSeptember 28, 2019 ,September 29, 2018 , andSeptember 30, 2017 , are derived from audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results are not necessarily indicative of the results that may be expected in any future period. Fiscal Year Ended October 2 October 3, September 28, September 29, September 30, 2021 2020 2019 2018 (4) 2017 (4) (In thousands, except share and per share amounts and percentages) Revenue$ 1,716,744 $ 1,326,328 $ 1,260,823 $ 1,137,008 $ 992,526 Cost of revenue (1) 906,750 754,372 733,480 647,700 536,461 Gross profit 809,994 571,956 527,343 489,308 456,065 Operating expenses Research and development (1) 230,078 214,672 171,174 142,109 124,394 Sales and marketing (1) 272,124 263,539 247,599 270,869 270,162 General and administrative (1) 152,828 120,978 102,871 85,205 77,118 Total operating expenses 655,030 599,189 521,644 498,183 471,674 Operating income (loss) 154,964 (27,233) 5,699 (8,875) (15,609) Other income (expense), net Interest income 146 1,998 4,349 731 120 Interest expense (592) (1,487) (2,499) (5,242) (4,380) Other income (expense), net 2,407 6,639 (8,625) (1,162) 3,361 Total other income (expense), net 1,961 7,150 (6,775) (5,673) (899) Income (loss) before provision for (benefit from) income taxes 156,925 (20,083) (1,076) (14,548) (16,508) Provision for (benefit from) income taxes (1,670) 32 3,690 1,056 (2,291) Net income (loss)$ 158,595 $ (20,115) $ (4,766) $ (15,604) $ (14,217) Net income (loss) per share attributable to common stockholders:?²? Basic$ 1.30 $ (0.18) $ (0.05) $ (0.24) $ (0.25) Diluted$ 1.13 $ (0.18) $ (0.05) $ (0.24) $ (0.25) Weighted-average shares used in computing net income (loss) per share attributable to common stockholders:?²? Basic 122,245,212 109,807,154 103,783,006 65,706,215 56,314,546 Diluted 140,309,152 109,807,154 103,783,006 65,706,215 56,314,546 Other Data: Products sold(5) 6,503 5,806 6,204 5,165 4,034 Adjusted EBITDA (3)$ 278,585 $ 108,543 $ 88,689 $ 69,128 $ 55,955 Adjusted EBITDA margin (3) 16.2 % 8.2 % 7.0 % 6.1 % 5.6 % 36
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(1)Stock-based compensation was allocated as follows:
Fiscal Year Ended
October 2, October 3, September 28, September 29, September 30,
2021 2020 2019 2018 2017
(In thousands)
Cost of revenue $ 988 $ 1,106 $ 985 $ 198 $ 240
Research and development 25,075 23,439 17,643 13,960 13,605
Sales and marketing 13,570 14,359 12,965 15,885 15,086
General and administrative 22,494 18,706 14,982 8,602 7,619
Total stock-based compensation
expense $ 62,127 $ 57,610 $ 46,575 $ 38,645 $ 36,550
(2)See Note 11. Net Income (Loss) Per Share Attributable to Common Stockholders
of the notes to our consolidated financial statements included elsewhere in this
Annual Report on Form 10-K for an explanation of the calculations of our net
income (loss) per share attributable to common stockholders, basic and diluted.
(3)Adjusted EBITDA and adjusted EBITDA margin are financial measures that are
not calculated in accordance with U.S. GAAP. See the section titled "-Non-GAAP
Financial Measures" below for information regarding our use of these non-GAAP
financial measures and a reconciliation of net income (loss) to adjusted EBITDA.
(4)Reflects the impact of the adoption of new accounting standard in fiscal year 2018 related to revenue recognition.
(5)Products sold for the fiscal years 2019, 2018, and 2017 have been recast to reflect the change in product revenue categorization.
As of
October 2, October 3, September 28, September 29, September 30,
2021 2020 2019 2018 2017
(In thousands)
Consolidated balance sheet data:
Cash and cash equivalents $ 640,101 $ 407,100 $ 338,641 $ 220,930 $ 130,595
Working capital 481,384 267,362 276,635 201,243 78,203
Total assets 1,138,804 816,051 761,605 587,498 400,020
Total long-term debt - 18,251 24,840 33,097 39,600
Total liabilities 569,762 518,212 480,677 379,140 309,652
Redeemable convertible preferred
stock - - - - 90,341
Accumulated deficit (69,897) (228,492) (208,377) (203,611) (188,007)
Total stockholders' equity 569,042 297,839 280,928 208,358 27
Non-GAAP Financial Measures
To supplement our consolidated financial statements presented in accordance with
U.S. GAAP, we monitor and consider adjusted EBITDA and adjusted EBITDA margin,
which are non-GAAP financial measures. These non-GAAP financial measures are not
based on any standardized methodology prescribed by U.S. GAAP and are not
necessarily comparable to similarly titled measures presented by other
companies.
We define adjusted EBITDA as net income (loss) adjusted to exclude the impact of
depreciation, stock-based compensation expense, interest income, interest
expense, other income (expense), income taxes and other items that we do not
consider representative of underlying operating performance. We define adjusted
EBITDA margin as adjusted EBITDA divided by revenue.
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We use these non-GAAP financial measures to evaluate our operating performance
and trends and make planning decisions. We believe that these non-GAAP financial
measures help identify underlying trends in our business that could otherwise be
masked by the effect of the expenses and other items that we exclude in these
non-GAAP financial measures. Accordingly, we believe that these non-GAAP
financial measures provide useful information to investors and others in
understanding and evaluating our operating results, enhancing the overall
understanding of our past performance and future prospects, and allowing for
greater transparency with respect to a key financial metric used by our
management in its financial and operational decision-making.
Adjusted EBITDA and adjusted EBITDA margin are non-GAAP financial measures, and
should not be considered in isolation of, or as an alternative to, measures
prepared in accordance with U.S. GAAP. There are a number of limitations related
to the use of adjusted EBITDA rather than net income (loss), which is the
nearest U.S. GAAP equivalent of adjusted EBITDA, and the use of adjusted EBITDA
margin rather than operating margin, which is the nearest U.S. GAAP equivalent
of adjusted EBITDA margin. These limitations include that the non-GAAP financial
measures:
•exclude depreciation and amortization, and although these are non-cash
expenses, the assets being depreciated may be replaced in the future;
•exclude stock-based compensation expense, which has been, and will continue to
be, a significant recurring expense for our business and an important part of
our compensation strategy;
•do not reflect interest income, primarily resulting from interest income earned
on our cash and cash equivalent balances;
•do not reflect interest expense, or the cash requirements necessary to service
interest or principal payments on our debt, which reduces cash available to us;
•do not reflect the effect of foreign currency exchange gains or losses, which
is included in other income (expense), net;
•do not reflect the provision for or benefit from income tax that may result in
payments that reduce cash available to us;
•do not reflect non-recurring expenses and other items that are not considered
representative of our underlying operating performance which reduce cash
available to us; and
•may not be comparable to similar non-GAAP financial measures used by other
companies, because the expenses and other items that we exclude in our
calculation of these non-GAAP financial measures may differ from the expenses
and other items, if any, that other companies may exclude from these non-GAAP
financial measures when they report their operating results.
Because of these limitations, these non-GAAP financial measures should be
considered along with other operating and financial performance measures
presented in accordance with
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The following table presents a reconciliation of net income (loss) to adjusted
EBITDA:
Fiscal Year Ended
October 2, October 3, September 28, September 29, September 30,
2021 2020 2019 2018 2017
(In thousands, except
percentages)
Net income (loss) $ 158,595 $ (20,115) $
(4,766)
36,426 36,415 39,358 35,014
Stock-based compensation
expense 62,127 57,610 46,575 38,645 36,550
Interest income (146) (1,998) (4,349) (731) (120)
Interest expense 592 1,487 2,499 5,242 4,380
Other (income) expense, net (2,407) (6,639) 8,625 1,162 (3,361)
Provision for (benefit from)
income taxes (1,670) 32 3,690 1,056 (2,291)
Restructuring and related
expenses (1) (2,446) 26,285 - - -
Legal and transaction related
costs (2) 30,058 15,455 - - -
Adjusted EBITDA $ 278,585 $ 108,543 $ 88,689 $ 69,128 $ 55,955
Revenue $ 1,716,744 $ 1,326,328 $ 1,260,823 $ 1,137,008 $ 992,526
Adjusted EBITDA margin 16.2 % 8.2 % 7.0 % 6.1 % 5.6 %
(1) See Note 14. Restructuring Plan of the notes to our consolidated financial
statements included elsewhere in this Annual Report on Form 10-K for further
discussion related to our restructuring plan.
(2) Legal and transaction-related costs consist of expenses related to our
intellectual property ("IP") litigation against Alphabet and Google as well as
legal and transaction costs associated with our acquisition activity in the
first quarter of fiscal 2020, which we consider non-recurring expenses and do
not consider representative of our underlying operating performance.
Comparison of Fiscal Years 2021 and 2020
Revenue
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Sonos speakers $ 1,378,808 $ 1,034,813 $ 343,995 33.2 %
Sonos system products 265,180 218,788 46,392 21.2
Partner products and other revenue 72,756 72,727 29 -
Total revenue $ 1,716,744 $ 1,326,328 $ 390,416 29.4 %
Volume data (products sold in thousands) Units %
Total products sold 6,503 5,806 697 12.0
Total revenue increased $390.4 million , or 29.4%, for fiscal 2021 compared to
fiscal 2020. The 53rd week in fiscal 2020 added approximately $25.0 million in
fiscal 2020 revenue. Excluding the 53rd week in fiscal 2020, revenue increased
approximately 31.9% for fiscal 2021 compared to fiscal 2020. The increase was
driven by strong overall demand across all our product categories and the
success of new product launches, partially offset by the impact of constrained
product availability.
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Sonos speakers revenue represented 80.3% of total revenue for fiscal 2021 and
increased by 33.2% for fiscal 2021 compared to fiscal 2020 led by the launch of
Roam and the continued success of Arc and Sub. Sonos system products revenue
represented 15.4% of total revenue for fiscal 2021 and increased 21.2% for
fiscal 2021 compared to fiscal 2020. Partner products and other revenue
represented 4.2% of total revenue for fiscal 2021 and remained flat for fiscal
2021 compared to fiscal 2020. This category was more significantly impacted by
reduced orders as IKEA slowed ordering modules given impacts of COVID-19 and as
a result of cyclical product launches.
Volume growth of products sold for fiscal 2021 compared to fiscal 2020 was
driven by growth in Sonos speakers and Sonos system products. The rate of
increase of volume of products sold and revenue differed for fiscal 2021
compared to fiscal 2020 primarily due to product and channel mix on revenue.
This volume growth was partially offset by volume declines by IKEA that slowed
ordering modules due to impacts of COVID-19 and as a result of the cyclical
product launches.
Revenue for fiscal 2021 compared to fiscal 2020 increased 29.8% in the Americas ,
increased 31.3% in Europe , Middle East and Africa ("EMEA"), and increased 17.8%
in APAC.
In constant currency U.S. dollars, total revenue increased by 25.7% for fiscal
2021 compared to fiscal 2020. We calculate constant currency growth percentages
by translating our prior period financial results using the current period
average currency exchange rates and comparing these amounts to our current
period reported results.
Cost of Revenue and Gross Profit
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Cost of revenue $ 906,750 $ 754,372 $ 152,378 20.2 %
Percentage of revenue 52.8 % 56.9 %
Gross profit $ 809,994 $ 571,956 $ 238,038 41.6 %
Gross margin 47.2 % 43.1 %
Cost of revenue increased $152.4 million , or 20.2%, from $754.4 million for
fiscal 2020 to $906.8 million for fiscal 2021. The increase in cost of revenue
was driven by the increase in products sold, as well as expedited air freight
shipping, product mix, and an overall increase in shipping and logistics costs
incurred related to industry-wide supply chain challenges. This increase was
partially offset by a reduction in tariff expenses during the year, recognition
of $18.3 million in refunds from tariffs paid in prior periods, product and
material cost savings realized in the first quarter of fiscal 2021, and fixed
cost leverage on higher sales volume.
Gross margin increased 410 basis points for fiscal 2021 compared to fiscal 2020.
The increase was driven by the reduction in tariff costs as we continue to
diversify into Malaysia as well as a reduction in tariff rate in the first half
of the year compared to the prior year. We also recognized $18.3 million in
refunds from tariffs paid in prior periods. Excluding the effects of tariffs in
both periods, gross margin would have been 46.9%, an increase of 130 basis
points, for fiscal 2021 compared to fiscal 2020. Favorability was mainly driven
by lower promotional discounts in the current year compared with the discounts
offered in the prior year, which included the "At Home With Sonos" campaign, as
well as product and material cost reductions realized in the first quarter of
fiscal 2021, fixed cost leverage on higher sales volumes realized in the second
and third quarters of fiscal 2021, and a shift in product mix into higher margin
products. The increase was partially offset by increased component costs and
increased shipping and logistics costs, related to broader industry-wide supply
chain challenges. We calculate gross margin excluding the effects of tariffs by
removing the net impact of tariffs imposed on goods imported from China to the
United States from gross profit divided by total revenue.
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Research and Development
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Research and development $ 230,053 $ 209,598 $ 20,455 9.8 %
Restructuring and related expenses 25 5,074 (5,049) (99.5) %
Total research and development $ 230,078 $ 214,672 $ 15,406 7.2 %
Percentage of revenue 13.4 % 16.2 %
Research and development expenses increased $15.4 million , or 7.2%, for fiscal
2021 compared to fiscal 2020. Excluding the impact of $5.0 million of
restructuring and related expenses for employee severance and benefit costs,
site closures, and other costs related to the 2020 restructuring plan, research
and development expenses for fiscal 2021 compared to fiscal 2020 increased by
9.8%. The increase was primarily due to higher personnel-related expenses of
$12.4 million due to increased headcount and higher bonus, stock-based
compensation and related payroll taxes as well as an increase of $5.0 million in
product development costs and professional fees. These increases were partially
offset by the costs of diversifying our manufacturing into Malaysia in the prior
year, and ongoing cost savings associated with the 2020 restructuring plan and a
reduction of costs related to global travel restrictions and work-from-home
policies due to COVID-19.
Sales and Marketing
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Sales and marketing $ 274,595 $ 243,751 $ 30,844 12.7 %
Restructuring and related expenses (2,471) 19,788 (22,259) (112.5) %
Total sales and marketing $ 272,124 $ 263,539 $ 8,585 3.3 %
Percentage of revenue 15.9 % 19.9 %
Sales and marketing expenses increased $8.6 million , or 3.3%, for fiscal 2021
compared to fiscal 2020. Excluding the year-over-year impact of $22.3 million of
restructuring and related expenses for employee severance and benefit costs,
site closures, and other costs related to the 2020 restructuring plan, sales and
marketing expenses for fiscal 2021 compared to fiscal 2020 increased by 12.7%.
This increase was primarily due to higher marketing expenses related to support
new product launches of $35.8 million , higher fees resulting from increased
sales in our direct-to-consumer channel of $5.8 million , and higher
personnel-related expenses due to higher bonus and related payroll taxes of $2.0
million . This was partially offset by cost savings associated with the 2020
restructuring plan of $8.7 million and a reduction of costs related to global
travel restrictions and work-from-home policies due to COVID-19.
General and Administrative
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
General and administrative $ 152,828 $ 119,555 $ 33,273 27.8 %
Restructuring and related expenses - 1,423 (1,423) (100.0) %
Total general and administrative $ 152,828 $ 120,978 $ 31,850 26.3 %
Percentage of revenue 8.9 % 9.1 %
General and administrative expenses increased $31.9 million , or 26.3%, for
fiscal 2021 compared to fiscal 2020. Excluding the impact of $1.4 million of
restructuring and related expenses for employee severance and benefit costs,
site
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closures, and other costs related to the 2020 restructuring plan, general and
administrative expenses for fiscal 2021 increased compared to fiscal 2020 by
27.8%. This increase was primarily due to $15.7 million incremental legal fees
paid in connection with our IP litigation, higher personnel-related expenses of
$13.7 million due to increased headcount, higher bonus, stock-based compensation
and related payroll tax expenses, as well as $8.7 million in professional fees
primarily related to our investments in information technology. These increases
were partially offset by cost savings associated with the 2020 restructuring
plan and a reduction of costs related to global travel restrictions and
work-from-home policies due to COVID-19.
Other Income (Expense), Net
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Interest income $ 146 $ 1,998 $ (1,852) (92.7)%
Interest expense $ 592 $ 1,487 $ (895) (60.2)%
Other income, net $ 2,407 $ 6,639 $ (4,232) (63.7)%
Interest income decreased by
Interest expense decreased by
Other income, net decreased from
Provision for (Benefit From) Income Taxes
Fiscal Year Ended Change from Prior Fiscal Year
October 2, October 3,
2021 2020 $ %
(Dollars in thousands)
Provision for (benefit from) income taxes $ (1,670) $ 32 $ (1,702) *
* not meaningful
Benefit from income taxes increased$1.7 million , from a provision of less than$0.1 million for fiscal 2020 to a benefit of$1.7 million for fiscal 2021. For fiscal 2021, we recorded a benefit of$2.1 million for non-U.S. entities and a provision of$0.4 million for theU.S. entity, resulting in a total tax benefit of$1.7 million . The benefit from income taxes for the year endedOctober 2, 2021 , includes a benefit of$7.8 million from the release of the valuation allowance inthe Netherlands offset by the provision for income taxes recognized on current year earnings. For fiscal 2020, we recorded a provision for income taxes of$0.7 million for certain profitable foreign entities, and a benefit of$0.7 million forU.S. federal and state income taxes for a total provision of less than$0.1 million . Comparison of Fiscal Years 2020 and 2019 For the comparison of fiscal years 2020 and 2019, refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" on Form 10-K for our fiscal year endedOctober 3, 2020 , filed with theSEC onNovember 23, 2020 , under the subheading "Comparison of fiscal years 2020 and 2019."
Liquidity and Capital Resources
Our operations are financed primarily through cash flows from operating
activities and net proceeds from the sale of our equity securities. As of
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cash and cash equivalents of $640.1 million , including $78.4 million held by our
foreign subsidiaries, proceeds from the exercise of stock options and borrowing
capacity under the Credit Facility. In accordance with our policy, the
undistributed earnings of our non-U.S. subsidiaries remain indefinitely
reinvested outside of the United States as of October 2, 2021 , as they are
required to fund needs outside of the United States . In the event funds from
foreign operations are needed to fund operations in the United States and if
U.S. tax has not already been previously provided, we may be required to accrue
and pay additional U.S. taxes to repatriate these funds.
In response to the impacts of COVID-19, we implemented a number of initiatives
to maintain our liquidity and rationalize our operating expenses, and initiated
the 2020 restructuring plan during the third quarter of fiscal 2020. We believe
our existing cash and cash equivalent balances, cash flows from operations and
committed credit lines will be sufficient to meet our long-term working capital
and capital expenditure needs for at least the next 12 months. In October 2021 ,
subsequent to fiscal 2021, we entered into a credit agreement with JPMorgan
Chase Bank, N.A ., Bank of America N.A ., Morgan Stanley Senior Funding, Inc. , and
Goldman Sachs Bank USA , which allows us to borrow up to $100 million , with a
maturity date of October 2026 . (For more information, see Note 15. Subsequent
Event of the notes to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.) Our future capital requirements may vary
materially from those currently planned and will depend on many factors,
including our rate of revenue growth, the timing and extent of spending on
research and development efforts and other business initiatives, our planned
sales and marketing activities, the timing of new product introductions, our
potential merger and acquisition activity, market acceptance of our products,
and overall economic conditions. To the extent that current and anticipated
sources of liquidity are insufficient to fund our future business activities and
requirements, we may be required to seek additional equity or debt financing.
The sale of additional equity would result in increased dilution to our
stockholders. If we were to incur additional debt financing it would result in
increased debt service obligations and the instruments governing such debt could
provide for operating and financing covenants that would restrict our
operations.
Debt Obligations
Prior to repayment, our debt obligation consisted of the Credit Facility. In
January 2021 , we repaid all of our outstanding principal balance of $24.9
million under the Term Loan which had an original maturity date of October 28,
2021 . As of October 2, 2021 , we did not have any remaining short- or long-term
debt obligations, and as of October 3, 2020 , our short- and long-term debt
obligations were as follows:
October 3,
2020
Rate Balance
(In thousands, except percentages)
Term Loan (1) 2.4 % $ 25,000
Unamortized debt issuance costs (2) (82)
Total indebtedness 24,918
Less short term portion (6,667)
Long-term debt $ 18,251
(1)Original maturity date of October 28, 2021 , bore interest at a variable rate
equal to an adjusted LIBOR plus 2.25%, payable quarterly.
(2)Debt issuance costs were recorded as a debt discount and recorded as interest
expense over the term of the agreement.
The Credit Facility allowed us to borrow up to $80.0 million restricted to the
value of the borrowing base which was based on the value of our inventory and
accounts receivable and was subject to quarterly redetermination. The Credit
Facility had an original maturity date of October 28, 2021 , and could be drawn
as Commercial Bank Floating Rate Loans (at the higher of prime rate or adjusted
LIBOR plus 2.50%) or Eurocurrency Loans (at LIBOR plus an applicable margin). As
of both October 2, 2021 , and October 3, 2020 , we did not have any outstanding
borrowings and had $2.9 million and $0.5 million , respectively, in undrawn
letters of credit that reduced the availability under the Credit Facility.
Debt obligations under the Credit Facility required that we maintain a consolidated fixed charge ratio of at least 1.0, restrict distribution of dividends unless certain conditions are met, such as having a fixed charge ratio of at least 1.15, and
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required financial statement reporting and delivery of borrowing base
certificates. As of October 2, 2021 , and October 3, 2020 , we were in compliance
with all financial covenants. The Credit Facility was collateralized by our
eligible inventory and accounts receivable as well as our intellectual property
including patents and trademarks. For more information, see Note 15. Subsequent
Event of the notes to our consolidated financial statements included elsewhere
in this Annual Report on Form 10-K.
Cash Flows
Fiscal 2021 Changes in Cash Flows
The following table summarizes our cash flows for the periods indicated:
Fiscal Year Ended
October 2, October 3,
2021 2020
(In thousands)
Net cash provided by (used in):
Operating activities $ 253,226 $ 161,986
Investing activities (45,531) (69,324)
Financing activities 24,967 (27,091)
Effect of exchange rate changes 148 2,900
Net increase in cash, cash equivalents and restricted cash
Cash Flows from Operating Activities
Net cash provided by operating activities of$253.2 million for fiscal 2021 consisted of net income of$158.6 million , non-cash adjustments of$92.1 million and a net increase in cash related to changes in operating assets and liabilities of$2.6 million . Non-cash adjustments primarily consisted of stock-based compensation expense of$62.1 million , depreciation and amortization of$33.9 million , and impairment and abandonment charges of$3.6 million . The net increase in net operating assets and liabilities was primarily due to an increase in accrued compensation of$33.4 million primarily due to an increase in bonuses, an increase in deferred revenue of$27.6 million , and an increase in accounts payable and accrued expenses of$26.2 million . The increase in net operating assets and liabilities was partially offset by an increase in accounts receivable of$45.7 million driven by revenue growth, an increase in other assets of$30.0 million primarily due to capitalized costs for activities to replace our legacy enterprise resource management system, as well as deferred costs for newly launched products sold not recognized until reaching the date of general availability, an increase in inventory of$7.9 million as well as a decrease in other liabilities$1.1 million .
Cash Flows from Investing Activities
Cash used in investing activities for fiscal 2021 of$45.5 million was primarily due to payments for property, equipment and other assets. Payments for property, equipment, and intangible assets were primarily comprised of manufacturing-related tooling and test equipment to support the launch of new products as well as other assets. Cash Flows from Financing Activities Cash provided by financing activities for fiscal 2021 of$25.0 million was primarily by proceeds from the exercise of stock options of$147.8 million , partially offset by$50.0 million for payments for repurchases of common stock,$47.8 million for payments for repurchases of common stock related to shares withheld for taxes associated with vesting of RSUs, as well as repayments for borrowings of$25.0 million .
Fiscal 2020 Changes in Cash Flows
For the comparison of fiscal 2019 to fiscal 2018, refer to Part II, Item 7 "Management's discussion and analysis of financial condition and results of operations" of our Form 10-K for our fiscal year endedOctober 3, 2020 , filed with theSEC onNovember 23, 2020 , under the subheading "Liquidity and capital resources." 44
-------------------------------------------------------------------------------- Table of contents Contractual obligations
The following table presents certain payments due by the Company as of
Payments due by period
1-3 3-5 More than 5
Total < 1 year years years years
(In thousands)
Operating leases (1) $ 49,692 $ 13,407
92,488 92,488 - - -
Other purchase obligations (3) 57,112 32,447 24,665 - -
Total $ 199,292 $ 138,342 $ 50,096 $ 10,720 $ 134
(1)We have lease arrangements for certain offices and facilities as well as auto
leases. The above contractual obligations table includes future payments under
leases that had commenced as of October 2, 2021 , and were therefore recorded on
the Company's Consolidated Balance Sheets. See Note 6. Leases of the notes to
our consolidated financial statements included elsewhere in this Annual Report
on Form 10-K for further information.
(2)Includes estimated obligations under purchase orders related to inventory.
Excludes agreements that can be cancelled without penalty.
(3)Our other purchase obligations consist of non-cancelable obligations related
to software, advertising, and telecommunication services, and other activities.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance withU.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ materially from those estimates. Our critical accounting policies requiring estimates, assumptions and judgments that we believe have the most significant impact on our consolidated financial statements are described below.
Revenue Recognition
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. We generally enter into contracts that include a combination of products and services. Revenue is allocated to distinct performance obligations and is recognized net of allowances for returns, discounts, sales incentives and any taxes collected from customers, which are subsequently remitted to governmental authorities. Shipping and handling costs associated with outbound freight after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of revenue. We do not have material assets related to incremental costs to obtain or fulfill customer contracts.
Nature of Products and Services
Our product revenue primarily includes sales of Sonos speakers and Sonos system products, which include software that enables our products to operate over a customer's wireless network as well as connect to various third-party services, including music and voice. We also generate a small portion of revenue from partner products and other revenue sources, such as module revenue from ourIKEA partnership, architectural speakers from our Sonance partnership, and accessories such as speaker stands and wall mounts, as well as professional services, licensing and advertising revenue. Module revenue is comprised of hardware and embedded software that is integrated into final products that are manufactured and sold by our partners. Our software primarily consists of firmware embedded in the products and the Sonos app, which is software that can be downloaded to consumer devices at no charge, with or without the purchase of one of our products. Products and related software are accounted for as a single performance obligation and all intended functionality is available to the customer upon purchase. The revenue allocated to the products and related software is the substantial portion of the total sale price. Revenue is recognized at the point in time when control is transferred, which is either upon shipment or upon delivery to the customer, depending on delivery terms. 45
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Our service revenue includes revenue allocated to (i) unspecified software upgrades and (ii) cloud-based services that enable products to access third-party music and voice assistant platforms, which are each distinct performance obligations and are provided to customers at no additional charge. Unspecified software upgrades are provided on a when-and-if-available basis and have historically included updates and enhancements such as bug fixes, feature enhancements and updates to the ability to connect to third-party music or voice assistant platforms. Service revenue is recognized ratably over the estimated service period. Significant Judgments
Our contracts with customers generally contain promises to transfer products and services as described above. Determining whether products and services are considered distinct performance obligations that should be accounted for separately may require significant judgment.
Determining the standalone selling price ("SSP") for each distinct performance
obligation requires judgment. We estimate SSP for items that are not sold
separately, which include the products and related software, unspecified
software upgrades and cloud services, using information that may include
competitive pricing information, where available, as well as analysis of the
cost of providing the products or services plus a reasonable margin. In
developing SSP estimates, we also consider the nature of the products and
services and the expected level of future services.
Determining the revenue recognition period for unspecified software upgrades and
cloud services requires judgment. We recognize revenue attributable to these
performance obligations ratably over the best estimate of the period that the
customer is expected to receive the services. In developing the estimated period
of providing future services, we consider our past history, our plans to
continue to provide services, including plans to continue to support updates and
enhancements to prior versions of our products, expected technological
developments, obsolescence, competition and other factors. The estimated service
period may change in the future in response to competition, technology
developments and our business strategy.
Estimating variable consideration such as sales incentives and product returns
requires judgment. We offer sales incentives through various programs,
consisting primarily of discounts, cooperative advertising and market
development fund programs. We record transactions related to cooperative
advertising and market development fund programs with customers as a reduction
to revenue unless we receive a distinct benefit in exchange for credits claimed
by the customer and can reasonably estimate the fair value of the benefit
received, in which case we record them as operating expenses. We recognize a
liability, or a reduction to accounts receivable, and reduce revenue for sales
incentives based on the estimated amount of sales incentives that will be
claimed by customers. Estimates for sales incentives are developed using the
most likely amount and are included in the transaction price to the extent that
a significant reversal of revenue would not result once the uncertainty is
resolved. In developing our estimates, we also consider the susceptibility of
the incentive to outside influences, the length of time until the uncertainty is
resolved, our experience with similar contracts, and the range of possible
outcomes. Reductions in revenue related to discounts are allocated to products
and services on a relative basis based on their respective SSP. Judgment is
required to determine the timing and amount of recognition of marketing funds,
which we estimate based on past practice of providing similar funds.
We accept returns from direct customers and from certain resellers. To establish
an estimate for returns, we use the expected value method by considering a
portfolio of contracts with similar characteristics to calculate the historical
returns rate. When determining the expected value of returns, we consider future
business initiatives and relevant anticipated future events.
Inventories
Inventories consist of finished goods and component parts, which are purchased from contract manufacturers and component suppliers. Inventories are stated at the lower of cost and net realizable value on a first-in, first-out basis. We assess the valuation of inventory balances including an assessment to determine potential excess and/or obsolete inventory. We may be required to write down the value of inventory if estimates of future demand and market conditions indicate estimated excess and/or obsolete inventory.
Product Warranties
Our products are covered by a warranty to be free from defects in material and
workmanship for a period of one year, except for products sold in the EU and
select other countries where we provide a two-year warranty. At the time of
sale, an
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estimate of future warranty costs is recorded as a component of the cost of
revenue. Our estimate of costs to fulfill our warranty obligations is based on
historical experience and expectations of future costs to repair or replace.
Income Taxes
Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect our best estimate of current and future taxes to be paid. Significant judgments and estimates are required in the determination of the consolidated income tax expense. We prepare and file income tax returns based on our interpretation of each jurisdiction's tax laws and regulations. In preparing our consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. Significant management judgment is required in assessing the realizability of our deferred tax assets. In performing this assessment, we consider whether it is "more-likely-than-not" that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In making this determination, we consider the scheduled reversal of deferred tax liabilities, projected future taxable income and the effects of tax planning strategies. We recorded a valuation allowance against all ourU.S. deferred tax assets and certain of our foreign deferred tax assets as ofOctober 2, 2021 . We intend to continue maintaining a full valuation allowance on ourU.S. and certain foreign deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances. We account for uncertain tax positions using a "more-likely-than-not" threshold for recognizing and resolving uncertain tax positions. We evaluate uncertain tax positions on a quarterly basis and consider various factors, that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, information obtained during in process audit activities and changes in facts or circumstances related to a tax position. We accrue for potential interest and penalties related to unrecognized tax benefits in income tax expense. Our policy with respect to the undistributed earnings of our non-U.S. subsidiaries is to maintain an indefinite reinvestment assertion as they are required to fund needs outside ofthe United States . This assertion is made on a jurisdiction by jurisdiction basis and takes into account the liquidity requirements in boththe United States and of our foreign subsidiaries. 47
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