GRMN 10-Q Quarter ended June 30, 2012

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 30, 2012

or

For the transition period from to

Commission file number 0-31983

GARMIN LTD.

(Exact name of Company as specified in its charter)

Company's telephone number, including area code: + 41 52 630 1600

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer þ Accelerated Filer ¨ Non-accelerated Filer ¨ (Do not check if a smaller reporting company)  Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

Number of shares outstanding of the registrant’s common shares as of August 6, 2012

CHF 10.00 par value:  208,077,418 (including treasury shares)

Garmin Ltd.

Form 10-Q

Quarter Ended June 30, 2012

Table of Contents

Garmin Ltd.

Form 10-Q

Quarter Ended June 30, 2012

Introductory Comments

The Condensed Consolidated Financial Statements of Garmin Ltd. ("Garmin" or the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 31, 2011. Additionally, the Condensed Consolidated Financial Statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q.

The results of operations for the 13-week and 26-week periods ended June 30, 2012 are not necessarily indicative of the results to be expected for the full year 2012.

Garmin Ltd. And Subsidiaries

(In thousands, except share information)

See accompanying notes.

Garmin Ltd. And Subsidiaries

(In thousands, except per share information)

See accompanying notes.

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

See accompanying notes.

Garmin Ltd. And Subsidiaries

(In thousands)

See accompanying notes.

Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 30, 2012

(In thousands, except share and per share information)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 13-week and 26-week periods ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 29, 2012.

The condensed consolidated balance sheet at December 31, 2011 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore the financial results of certain fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended June 30, 2012 and June 25, 2011 both contain operating results for 13 weeks.

The components of inventories consist of the following:

The following table sets forth the computation of basic and diluted net income per share:

There were 5,647,688 and 5,959,686 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) for the 13-week periods ended June 30, 2012 and June 25, 2011, respectively.

There were 5,698,553 and 6,001,583 anti-dilutive equity awards for the 26-week periods ended June 30, 2012 and June 25, 2011, respectively.

There were 68,637 and 72,545 shares issued as a result of exercises of equity awards for the 13-week periods ended June 30, 2012 and June 25, 2011, respectively.

There were 212,718 and 251,916 shares issued as a result of exercises of equity awards for the 26-week periods ended June 30, 2012 and June 25, 2011, respectively.

The Company has identified five operating segments – Auto/Mobile, Aviation, Marine, Outdoor and Fitness. Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker, who allocates resources and assesses performance of each segment individually.

Net sales, operating income, and income before taxes for each of the Company’s reportable segments are presented below:

Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.

Net sales and property and equipment, net by geographic area are as follows as of and for the 26-week periods ended June 30, 2012 and June 25, 2011. Note that APAC includes Asia Pacific and EMEA includes Europe, the Middle East and Africa:

The Company’s products sold are generally covered by a warranty for periods ranging from one to three years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectation of future conditions and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.

We are party to certain commitments, which includes raw materials, advertising and other indirect purchases in connection with conducting our business. Pursuant to these agreements, the Company is contractually committed to make purchases of approximately $211,554 over the next five years.

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, actions, and complaints, including matters involving patent infringement and other intellectual property claims and various other risks. It is not possible to predict with certainty whether or not the Company and its subsidiaries will ultimately be successful in any of these legal matters, or if not, what the impact might be. However, the Company’s management does not expect that the results in any of these legal proceedings will have a material adverse effect on the Company’s results of operations, financial position or cash flows.

Our earnings before taxes increased 63% when compared to the same quarter in 2011, while our income tax expense increased by $3,937, to $21,532 for the 13-week period ended June 30, 2012, from $17,595 for the 13-week period ended June 25, 2011. The effective tax rate was 10.4% in the second quarter of 2012 and 13.8% in the second quarter of 2011. The decrease in the effective tax rate was primarily driven by the release of income tax reserves due to the expiration of statute of limitations in Taiwan. The effective tax rate was 11.2% in the first half of 2012 and 8.5% in the first half of 2011. The lower effective tax rate in 2011 was primarily driven by the release of reserves related to the expiration of certain statutes for Garmin Europe.  This was partially offset by the release of income tax reserves due to the expiration of statute of limitations in Taiwan during the second quarter of 2012. The remaining difference relates to the mix of income by tax jurisdiction.

The Accounting Standards Codification (ASC) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The ASC classifies the inputs used to measure fair value into the following hierarchy:

The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. All financial assets were valued using active markets (Level 1 inputs) at June 30, 2012 and December 31, 2011.

The following is a summary of the Company’s marketable securities classified as available-for-sale securities at June 30, 2012:

The following is a summary of the Company’s marketable securities classified as available-for-sale securities at December 31, 2011:

The cost of securities sold is based on the specific identification method.

The amortized cost and estimated fair value of marketable securities at June 30, 2012, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

During 2011, sales of products bundled with LMUs and premium traffic service increased significantly as a percentage of total product sales. Concurrently, market conditions caused decreases in the ASP and margins of comparable models year over year, new bundled products were introduced at lower ASPs, and the difference in pricing of bundled units and comparable unbundled models decreased considerably. Due to these changes, the Company determined it was appropriate to change its estimate of the per unit revenue and cost deferrals during the third quarter of 2011. Additional details are available in the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The change in the per unit revenue deferral discussed above and increased amortization of previously deferred revenues are the principal factors which led to net deferred revenue of $15.9 million and $61.7 million during the 13-week periods ended June 30, 2012 and June 25, 2011, respectively, and $15.2 million and $83.5 million during the 26-week periods ended June 30, 2012 and June 25, 2011, respectively.

10. License Fees

During the second quarter of 2012, the Company determined certain license fee payments to one of its suppliers had exceeded contractual requirements since the third quarter of 2010.  The periodic royalty audit by the supplier, which was already underway, was completed in June 2012, resulting in a net overpayment of such license fees of $20.8 million. This credit is reflected in cost of goods sold for the 13-week and 26-week periods ended June 30, 2012 and is included in accounts receivable on the June 30, 2012 condensed consolidated balance sheet.

The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by our management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of our assumptions prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's web site on the World Wide Web at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five business segments, the outdoor, fitness, marine, automotive/mobile and aviation markets. Our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.

Results of Operations

The following table sets forth our results of operations as a percentage of net sales during the periods shown:

Each of the Company’s segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The following table sets forth our results of operations (in thousands) including revenue (net sales), operating income, and income before taxes for each of our five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, automotive/mobile, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.

Comparison of 13-Weeks Ended June 30, 2012 and June 25, 2011

(Amounts included in the following discussion are stated in thousands unless otherwise indicated)

Net Sales

Net sales increased 7% for the 13-week period ended June 30, 2012 when compared to the year-ago quarter. The increase occurred in all segments excluding marine. Automotive/mobile revenue remains the largest portion of our revenue mix at 55% in the second quarter of 2012 compared to 54% in the second quarter of 2011.

Total unit sales increased 4% to 3,906 in the second quarter of 2012 from 3,756 in the same period of 2011. The increase in unit sales volume in the second quarter of fiscal 2012 was primarily attributable to increasing volumes in the outdoor and automotive/mobile segments.

Automotive/mobile segment revenue increased 8% from the year-ago quarter, as volumes increased 3% and the average selling price (ASP) increased 5%.  The volume gains were related to our acquisition of Navigon in July 2011, global market share gains and increasing volumes with our OEM partners.  The ASP increase was driven by bundled product offerings, which carry higher ASPs, comprising a higher percentage of our product mix, the increasing impact of amortization of previously deferred revenues, and a reduced per unit revenue deferral rate due to a change in accounting estimate in the third quarter of 2011. Revenue deferrals net of amortization of previously recorded deferrals were $16 million and $62 million for the second quarter of 2012 and 2011, respectively. ASP gains associated with product mix shifting toward large screen, full-featured devices were partially offset by a declining ASP for comparable models from the previous year.  Outdoor revenues increased 24% from the year-ago quarter as the Company gained market share in the GPS-enabled golf category, experienced strong sell-through of the refreshed eTrex ® series and recognized the benefit of an acquisition completed in the second half of 2011. Revenue growth in our fitness segment slowed to 5% from the year-ago quarter as new products sold well offset by strong performance in 2011 driven by promotional activity on discontinued products and the launch of new products in that period as well. Marine revenues declined 14% from the year-ago quarter as the Company experienced a difficult global marine environment.

Cost of Goods Sold

Cost of goods sold decreased 16% for the 13-week period ended June 30, 2012 when compared to the year ago quarter. The decrease was primarily driven by the automotive/mobile segment as cost of goods sold as a percentage of revenues decreased by 1570 basis points. The decline principally resulted from a $21 million one-time royalty fee benefit related to license fee overpayments identified in the second quarter of 2012 and agreed to by the supplier (530 basis points), a $40 million reduction in the year-over-year impact of deferred revenue and costs (610 basis points), and product mix shifting toward more recently introduced products carrying a higher margin profile. The reduced impact of deferred revenue is related to a reduced per unit revenue deferral rate due to a change in accounting estimate in the third quarter of 2011, as discussed in the Company’s Form 10-K for the year ended December 31, 2011, and increased amortization of previously deferred revenues and costs. Marine and fitness also posted significant declines in cost of goods sold due to product mix and decreased promotional activities in the current year.

Gross Profit

Gross profit dollars in the second quarter of 2012 increased 31% while gross profit margin increased 1100 basis points compared to the second quarter of 2011 driven primarily by the automotive/mobile segment. The automotive/mobile segment gross profit margin percentage improved to 51% driven primarily by the one-time royalty fee adjustment, increased amortization of previously deferred high margin revenue, a reduced per unit deferral and improved product mix, as discussed above. Marine and fitness gross profit margin percentage increased 780 basis points and 1090 basis points, respectively, from the year-ago quarter driven primarily by product mix shifting toward new products and less promotional activity in the current year as discussed above.

Advertising Expense

Advertising expense increased 12% in absolute dollars. The increase in absolute dollars occurred in marine, fitness and outdoor, and was driven primarily by cooperative advertising and increased media placement in the respective segments. As a percentage of revenues, advertising expenses were 5% in the second quarter of both 2012 and 2011 though marine and fitness experienced 320 and 160 basis point increases, respectively, for the reasons discussed above.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 16% in absolute dollars while increasing 110 basis points as a percentage of revenues compared to the year-ago quarter. The absolute dollar increase is primarily related to acquisitions in the second half of 2011, which added over $8 million and increased legal costs of approximately $8 million partially offset by a reduction in bad debt expense of approximately $3 million.

Research and Development Expense

Research and development expense increased 14% due to ongoing development activities for new products and the addition of over 350 new engineering personnel to our staff since the year-ago quarter, with over 200 engineers from recent acquisitions. Research and development costs increased $9.8 million when compared with the year-ago quarter representing a 70 basis point increase as a percent of revenue as research and development growth slightly outpaced revenue growth.

Operating Income

Operating income increased 55% in absolute dollars and increased 890 basis points as a percent of revenue when compared to the second quarter of 2011. Revenue growth and improving gross margin percentage, as discussed above, were only partially offset by increased operating expenses.

Other Income (Expense)

The average return on cash and investments during the second quarter of both 2012 and 2011 was 1.3%. The increase in interest income is attributable to increasing cash balances.

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling. The Taiwan Dollar is the functional currency of Garmin Corporation. The U.S. Dollar remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most European subsidiaries. As these entities have grown, currency fluctuations can generate material gains and losses. Additionally, Euro-based inter-company transactions can also generate currency gains and losses. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

The majority of the $7.8 million currency loss in the second quarter of 2012 was due to the strengthening of the U.S. Dollar compared to the Euro and the British Pound Sterling. The strengthening of the U.S. Dollar against the Taiwan Dollar contributed a partially offsetting gain. The movements of the Taiwan Dollar and Euro/British Pound Sterling have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs and cash held in non-functional currency while the Euro and British Pound Sterling transactions relate to revenue. During the second quarter of 2012, the U.S. Dollar strengthened 5.7% and 2.3% against the Euro and the British Pound Sterling, respectively, resulting in a $17.7 million loss. Offsetting this loss, the U.S. Dollar strengthened 1.4% compared to the Taiwan Dollar resulting in a gain of $11.7 million. The remaining net currency loss of $1.8 million is related to other currencies and timing of transactions.

The majority of the $14.6 million currency loss in the second quarter of 2011 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar. The U.S. Dollar weakened against the Euro and strengthened against the British Pound Sterling creating an immaterial impact. During the second quarter of 2011, the U.S. Dollar weakened 2.2% compared to the Taiwan Dollar resulting in a loss of $14.6 million. The remaining currency gains and losses related to other currencies and timing of transactions were immaterial.

Income Tax Provision

Our earnings before taxes increased 63% when compared to the same quarter in 2011, and our income tax expense increased 22%, to $21.5 million for the 13-week period ended June 30, 2012, from $17.6 million for the 13-week period ended June 25, 2011. The effective tax rate was 10.4% in the second quarter of 2012 and 13.8% in the second quarter of 2011. The decrease in the effective tax rate was primarily driven by the release of income tax reserves due to the expiration of statute of limitations in Taiwan.

Net Income

As a result of the above, net income increased 70% for the 13-week period ended June 30, 2012 to $185.9 million compared to $109.5 million for the 13-week period ended June 25, 2011.

Comparison of 26-Weeks Ended June 30, 2012 and June 25, 2011

(Amounts included in the following discussion are stated in thousands unless otherwise indicated)

Net Sales

Net sales increased 8% for the 26-week period ended June 30, 2012 when compared to the year-ago period. The increase occurred across all segments excluding marine with the greatest increase in the outdoor and fitness segments. Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 53% in the first half of 2011 to 52% in the first half of 2012.

Total unit sales increased 5% to 6,624 in the first half of 2012 compared to 6,281 in the same period of 2011. The unit sales volume increase in the first half of fiscal 2012 was primarily attributable to increasing volumes in the outdoor and automotive/mobile segments.

Automotive/mobile segment revenue increased 7% from the year-ago period, as volumes increased 3% and the average selling price (ASP) increased 3%. The volume gains were related to our acquisition of Navigon in July 2011, global market share gains and increasing volumes with our OEM partners.  The ASP increase was driven by bundled product offerings, which carry higher ASPs, comprising a higher percentage of our product mix, the increasing impact of amortization of previously deferred revenues, and a reduced per unit revenue deferral rate due to a change in accounting estimate in the third quarter of 2011. Revenue deferrals net of amortization of previously recorded deferrals were $15 million and $84 million for the 26-week periods ended June 30, 2012 and June 25, 2011, respectively. ASP gains were partially offset by a declining ASP for comparable models from the previous year.  Outdoor revenues increased 20% from the year-ago period as the Company gained market share in the GPS-enabled golf category, experienced strong sell-through of the refreshed eTrex series and recognized the benefit of an acquisition completed in the second half of 2011. Revenue growth in our fitness segment was 14% compared to the year-ago period as strong first quarter results related to the launch of new products were muted in the second quarter as we compared against strong performance in 2011 driven by promotional activity on discontinued products and the launch of new products.

Cost of Goods Sold