GRMN 10-Q Quarter ended June 29, 2013

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

or

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 5, 2013

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

Garmin Ltd.

Form 10-Q

Quarter Ended June 29, 2013

Table of Contents

Garmin Ltd.

Form 10-Q

Quarter Ended June 29, 2013

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 29, 2012. 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 29, 2013 are not necessarily indicative of the results to be expected for the full year 2013.

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 29, 2013

(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 29, 2013 are not necessarily indicative of the results that may be expected for the year ending December 28, 2013.

The condensed consolidated balance sheet at December 29, 2012 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 29, 2012.

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 29, 2013 and June 30, 2012 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 5,514,344 and 5,647,688 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) for the 13-week periods ended June 29, 2013 and June 30, 2012, respectively.

There were 5,540,636 and 5,698,553 anti-dilutive equity awards for the 26-week periods ended June 29, 2013 and June 30, 2012, respectively.

There were 43,833 and 68,637 shares issued as a result of exercises of equity awards for the 13-week periods ended June 29, 2013 and June 30, 2012, respectively.

There were 110,551 and 212,718 shares issued as a result of exercises of equity awards for the 26-week periods ended June 29, 2013 and June 30, 2012, 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 29, 2013 and June 30, 2012. 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 two 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 $210,315 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, other intellectual property, product liability, customer 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.

On March 14, 2013, the Company entered into a Memorandum of Agreement (the “Agreement”) with Bombardier, Inc. (“Bombardier”).  The Company is the supplier of the avionics system for the Lear 70 and Lear 75 aircraft currently in development for Learjet, Inc., which is a subsidiary of Bombardier (the “Program”). In order to assist Bombardier in connection with delayed cash flows from the Program partially related to the certification of avionics for the Program exceeding the planned delivery date, the Company agreed to provide Bombardier a short term, interest free, loan of $173,708 in cash in seven installments beginning on March 22, 2013 and ending on September 20, 2013 pursuant to the terms and conditions of the Agreement.  Bombardier will repay the loan in five installments beginning in November 2013 and ending in March 2014 pursuant to the terms and conditions of the Agreement. As of June 29, 2013, the Company had advanced $82,020 to Bombardier, which is included in prepaid and other current assets in the accompanying condensed consolidated balance sheet.

Our earnings before taxes decreased less than 1% when compared to the same quarter in 2012, while our income tax expense increased by $12,562, to $34,094 for the 13-week period ended June 29, 2013, from $21,532 for the 13-week period ended June 30, 2012. The effective tax rate was 16.5% in the second quarter of 2013 and 10.4% in the second quarter of 2012. The increase in the effective tax rate was primarily driven by an unfavorable income mix across tax jurisdictions and a reduction in income eligible for tax holiday in Taiwan.  The effective tax rate in both the second quarter of 2013 and 2012 was reduced by the release of income tax reserves of $9,957 and $8,128, respectively, due to the expiration of certain statutes of limitations in Taiwan .

The effective tax rate was 9.4% in the first half of 2013 and 11.2% in the first half of 2012. The lower effective tax rate in 2013 was primarily driven by the release of uncertain tax position reserves of $26,493 in the first half of 2013 compared to $8,128 in the first half of 2012 related to expiration of certain statutes of limitations or completion of tax audits, as well as the impact of $6,301 of research and development credits related to 2012 which were recognized when the related legislation was enacted in January 2013.  These benefits were partially offset by an unfavorable income mix across tax jurisdictions and a reduction in income eligible for tax holiday in Taiwan.

The FASB ASC topic entitled Fair Value Measurements and Disclosures 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 accounting guidance 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. The valuation methods used by the Company for each significant class of investments are summarized below.

Mortgage-backed securities, corporate bonds and obligations of states and political subdivisions – Valued based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.

Common stocks – Valued at the closing price reported on the active market on which the individual securities are traded.

The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.

Available for sale securities measured at estimated fair value on a recurring basis are summarized below:

The following is a summary of the Company’s marketable securities classified as available-for-sale securities at June 29, 2013:

In the first half of 2013, Garmin experienced unrealized, non-cash losses on its investment portfolio resulting in a balance of $40,993 of gross unrealized losses on marketable securities at June 29, 2013.  The amortized cost and estimated fair value of the securities at an unrealized loss position at June 29, 2013 were $1,114,538 and $1,072,270, respectively.  This decrease in estimated fair value is primarily due to market valuations on mortgage-backed securities and obligations of states and political subdivisions declining.  The decline was due to an unusual increase in the 10 Year Treasury Bond Yield during the second quarter, which caused market valuations of certain securities in our investment portfolios to decline.   Approximately 50% of the securities in our portfolio were at an unrealized loss position at June 29, 2013.  We have the ability to hold these securities until maturity or their value is otherwise recovered. We do not consider these unrealized losses to be other than temporary and no impairment has been recorded in the accompanying condensed consolidated statement of income.

The following is a summary of the Company’s marketable securities classified as available-for-sale securities at December 29, 2012:

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

The amortized cost and estimated fair value of marketable securities at June 29, 2013, 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.

On February 15, 2013, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $300,000 of its common shares.  A Rule 10b5-1 plan was adopted and allows the repurchase of its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.  The share repurchase authorization expires on December 31, 2014.  As of June 29, 2013, the Company had repurchased 383,790 shares using cash of $13,353.  There remains approximately $286,647 available for repurchase under this authorization.

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week and 26-week periods ended June 29, 2013:

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 26-week periods ended June 29, 2013:

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 29, 2012.

In July 2012, the FASB issued Accounting Standards Update (ASU) No. 2012-02 “Testing Indefinite-Lived Intangible Assets for Impairment” (ASU 2012-02), which is included in ASC Topic 350 (Intangibles—Goodwill and Other). ASU 2012-02 provides an option for companies to use a qualitative approach to test indefinite-lived intangible assets for impairment if certain conditions are met. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The implementation of the amended accounting guidance did not have a material impact on the Company’s financial statements.

In February 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-02 “Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income” (ASU 2013-02), which is included in ASC Topic 220 (Comprehensive Income). The objective of ASU 2013-02 is to improve the reporting of reclassifications out of accumulated other comprehensive income. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The Company has implemented this amendment and has included the required disclosure in the Notes to Condensed Consolidated Financial Statements.

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 29, 2012. 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 29, 2012.

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:

The Company manages its operations in five segments: outdoor, fitness, marine, automotive/mobile, and aviation, and each of its 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.

Garmin Ltd. And Subsidiaries

Net Sales, Operating Income and Income before Taxes by Segment (Unaudited)

Comparison of 13-Weeks Ended June 29, 2013 and June 30, 2012

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

Net Sales

Net sales decreased 3% for the 13-week period ended June 29, 2013 when compared to the year-ago quarter. The decrease was driven by the automotive/mobile segment which posted a 12% decline. Automotive/mobile revenue remains the largest portion of our revenue mix at 50% in the second quarter of 2013 compared to 55% in the second quarter of 2012.

Total unit sales decreased 7% to 3,631 in the second quarter of 2013 from 3,906 in the same period of 2012. The decrease in unit sales volume in the second quarter of fiscal 2013 was attributable to reduced PND volumes partially offset by growth in each of the other segments.

Automotive/mobile segment revenue decreased 12% from the year-ago quarter, as volumes decreased 16% partially offset by average selling price (ASP) improvement due to the amortization of previously deferred revenue exceeding current period revenue deferrals in the second quarter of 2013 and increased auto OEM contribution with a higher ASP. Aviation revenues increased 16% from the year-ago quarter as the OEM market improved in some aircraft categories, as well as contribution from recent share gains and aftermarket products. Revenues in our marine segment increased 7% as we shipped new products that improved our market position. Revenues in our outdoor segment increased 6% from the year-ago quarter on the strength of our golf portfolio and dog tracking and training products. Fitness revenues increased 3% on the strength of our cycling products and the Forerunner 10 but strong volume growth was partially offset by reduced ASPs associated with the Forerunner 10.

Cost of Goods Sold

Cost of goods sold increased 6% for the 13-week period ended June 29, 2013 when compared to the year ago quarter. The increase occurred in each of our segments that posted revenue growth with a slightly offsetting decline in automotive/mobile. Cost of goods as a percentage of revenues increased in all segments. Marine cost of goods as a percentage of revenue increased by 740 basis points primarily due to significant pricing discounts on aging inventory ahead of new product releases which occurred late in the quarter. Cost of goods as a percentage of revenue for fitness was negatively impacted by product mix and ASP declines, primarily related to the Forerunner 10. While the automotive/mobile segment recorded a 1% decline in cost of goods in absolute dollars, cost of goods as a percentage of revenues increased by 620 basis points primarily due to the effect of a $21 million one-time royalty fee benefit related to license fee overpayments recorded in the second quarter of 2012, offset slightly by the benefit from the amortization of previously deferred revenue and costs exceeding new deferrals on current period sales in the second quarter of 2013. Other segments experienced cost of goods sold increases generally commensurate with sales increases discussed above.

Gross Profit

Gross profit dollars in the second quarter of 2013 decreased 9% while gross profit margin decreased 370 basis points compared to the second quarter of 2012 driven primarily by the automotive/mobile segment. The automotive/mobile gross margin declined to 45% driven primarily by the royalty benefit recorded in the second quarter of 2012, as discussed above. The gross profit margin percentage for the marine and fitness segments also declined by 740 and 390 basis points, respectively, as discussed above.

Advertising Expense

Advertising expense decreased 23% in absolute dollars and declined 110 basis points as a percent of revenues. The decrease in absolute dollars occurred primarily in the automotive/mobile and marine segments. Automotive/mobile spending declined due to reduced volumes, as expected, and a reduction in cooperative advertising costs. Marine advertising declined due to less cooperative spending and promotional activities necessary with the release of newer products.

Selling, General and Administrative Expense