GRMN 10-Q Quarter ended Sept. 30, 2017

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2017

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 ¨ Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES ¨ NO ¨

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 October 30, 2017

CHF 0.10 par value:  198,077,418 (including treasury shares)

Garmin Ltd.

Form 10-Q

Quarter Ended September 30, 2017

Table of Contents

Garmin Ltd. And Subsidiaries

(In thousands, except per 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)

September 30, 2017

(In thousands, except 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. 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. Operating results for the 13-week and 39-week periods ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 30, 2017.

The condensed consolidated balance sheet at December 31, 2016 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, 2016.

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 53-week 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 13-week quarters. The quarters ended September 30, 2017 and September 24, 2016 both contain operating results for 13 weeks.

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify the accounting for share-based payment awards. The Company adopted ASU 2016-09 on a prospective basis during the quarter ended April 1, 2017. ASU 2016-09 requires excess tax benefits or deficiencies from stock-based compensation to be recognized in the income tax provision. We previously recorded these amounts to additional paid-in capital. Additionally, under ASU 2016-09, excess tax benefits and deficiencies are not estimated in the effective tax rate, rather, are recorded as discrete tax items in the period they occur. Excess income tax benefits from stock-based compensation arrangements are classified as a cash flow from operations under ASU 2016-09, rather than as a cash flow from financing activities. The most significant impact of ASU 2016-09 during the 39-week period ended September 30, 2017 is the recognition of income tax expense of $7,275 resulting from stock options and stock appreciation rights expiring unexercised. There were no material expirations during the 13-week period ended September 30, 2017. The impact of the tax expense associated with the expiration of stock option and stock appreciation rights on diluted earnings per share was $0.04 for the 39-week period ended September 30, 2017. The Company believes ASU 2016-09 may have a material effect on forthcoming periods. However, the Company is unable to reasonably estimate the impact due to the dependency of these items on the underlying share price of the Company.

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 1,051 and 3,170 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended September 30, 2017 and September 24, 2016, respectively.

There were 1,567 and 3,696 anti-dilutive equity awards outstanding during the 39-week periods ended September 30, 2017 and September 24, 2016, respectively.

There were 2 and 26 net shares issued as a result of exercises and releases of equity awards for the 13-week periods ended September 30, 2017 and September 24, 2016, respectively.

There were 161 and 39 shares issued as a result of exercises and releases of equity awards for the 39-week periods ended September 30, 2017 and September 24, 2016, respectively.

There were 248 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 39-week period ended September 30, 2017.

There were 285 ESPP shares issued from outstanding Treasury stock during the 39-week period ended September 24, 2016.

The Company has identified five reportable segments – auto, aviation, marine, outdoor and fitness. The Company’s Chief Operating Decision Maker (CODM) assesses segment performance and allocates resources to each segment individually.

Net sales (“revenue”), gross profit, and operating income 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 39-week periods ended September 30, 2017 and September 24, 2016. Note that APAC includes Asia Pacific and Australian Continent and EMEA includes Europe, the Middle East and Africa:

The Company’s products sold are generally covered by a standard 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.

Commitments

The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of September 30, 2017 was approximately $363,000. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

Contingencies

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly and annual basis, developments in legal proceedings, investigations, claims, and other loss contingencies that could affect any required accrual or disclosure or estimate of reasonably possible loss or range of loss. An estimated loss from a loss contingency is accrued by a charge to income if it is probable that an asset has been impaired or a liability has been incurred and the amount of the loss can be reasonably estimated. If a range of loss is estimated, and some amount within that range appears to be a better estimate than any other amount within that range, then that amount is accrued. If no amount within the range can be identified as a better estimate than any other amount, the Company accrues the minimum amount in the range.

If an outcome unfavorable to the Company is determined to be probable, but the amount of loss cannot be reasonably estimated or is determined to be reasonably possible, but not probable, we disclose the nature of the contingency and an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company’s aggregate range of reasonably possible losses includes (1) matters where a liability has been accrued and there is a reasonably possible loss in excess of the amount accrued for that liability, and (2) matters where a loss is believed to be reasonably possible, but not probable, and a liability therefore has not been accrued. This aggregate range only represents the Company’s estimate of reasonably possible losses and does not represent the Company’s maximum loss exposure. The assessment regarding whether a loss is probable or reasonably possible, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. In assessing the probability of an outcome in a lawsuit, claim or assessment that could be unfavorable to the Company, we consider the following factors, among others: a) the nature of the litigation, claim, or assessment; b) the progress of the case; c) the opinions or views of legal counsel and other advisers; d) our experience in similar cases; e) the experience of other entities in similar cases; and f) how we intend to respond to the lawsuit, claim, or assessment. Costs incurred in defending lawsuits, claims or assessments are expensed as incurred.

Other than the matter discussed below, management of the Company currently does not believe it is reasonably possible that the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies in the aggregate, for the fiscal quarter ended September 30, 2017. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. An adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect in the particular quarter or fiscal year in which a loss is recorded, but based on information currently known, the Company does not believe it is likely that losses from such matters would have a material adverse effect on the Company’s business or its consolidated financial position, results of operations or cash flows.

The Company settled or resolved certain matters during the 13-week and 39-week periods ended September 30, 2017 that did not individually or in the aggregate have a material impact on the Company’s business or its consolidated financial position, results of operations or cash flows.

In the Matter of Certain Marine Sonar Imaging Devices, Including Downscan and Sidescan Devices, Products Containing the Same, and Components Thereof

On June 9, 2014, Navico Inc. and Navico Holding AS (collectively “Navico”) filed a complaint with the United States International Trade Commission (“ITC”) alleging the Company infringed upon three specific Navico patents relating to downscan sonar. On December 1, 2015, the ITC issued a Final Determination concluding that there was infringement by Garmin. On August 30, 2016, Navico filed a request that the ITC initiate an enforcement proceeding for alleged violations by Garmin of the previous cease and desist orders issued by the ITC. On May 26, 2017, the Administrative Law Judge issued his initial enforcement determination concluding that Garmin’s sale of certain DownVü sonar products violated the ITC’s December 2015 orders and recommended a civil penalty of $37 million. On June 13, 2017, the US Court of Appeals for the Federal Circuit (“Federal Circuit”) reversed the ITC’s December 2015 Final Determination. Specifically, the Federal Circuit ruled that two of the three patents in suit are invalid and that Garmin does not infringe upon the third patent. The ITC stayed the issuance of a Final Determination in this enforcement proceeding pending the issuance by the Federal Circuit of its mandate, which occurred on October 31, 2017. The Company believes the claims in this complaint are without merit, believes it has valid defenses, believes there is a remote likelihood that the Company may have incurred a material loss with respect to this matter, and no loss accrual has therefore been recorded.

Navico Inc. And Navico Holding AS v. Garmin International, Inc. and Garmin USA, Inc. (U.S. District Court for the Northern District of Oklahoma)

On June 4, 2014, Navico filed suit in the United States District Court for the Northern District of Oklahoma alleging the Company infringed upon the same three specific Navico patents relating to downscan sonar that are the subject of their complaint filed with ITC discussed above. On January 15, 2016, the court issued an order staying this lawsuit pending the final determination of any appeal filed with the Federal Circuit concerning that ITC complaint. The Federal Circuit issued its mandate in this appeal on October 31, 2017, reversing the ITC’s December 2015 infringement ruling. The Company believes the claims in this lawsuit are without merit, believes it has valid defenses, believes there is a remote likelihood that the Company may have incurred a material loss with respect to this matter, and no loss accrual has therefore been recorded.

Navico Inc. And Navico Holding AS v. Garmin International, Inc. and Garmin USA, Inc. (U.S. District Court for the Eastern District of Texas)

On March 4, 2016, Navico filed suit in the United States District Court for the Eastern District of Texas, Marshall Division alleging the Company infringed upon two specific Navico patents relating to downscan sonar. On September 8, 2017, a jury returned a verdict finding that Garmin had willfully infringed upon those two patents and awarded damages of $38 million. The judge in this matter must now issue a final judgment which could result in damages of up to three times the original jury verdict (or up to $114 million). The final judgment could also include pre-judgment interest, post-judgment interest, and attorneys’ fees.

If the final judgment orders the Company to pay any amount of damages, the Company will appeal that decision to the Federal Circuit, based on grounds which the same court found in favor of the Company that similar Navico patents were not valid or were not infringed. The Company believes the claims in this lawsuit are without merit, is challenging the verdict, believes it has valid defenses, and will vigorously defend this matter. We believe the Federal Circuit will not uphold the validity of the asserted claims of these Navico patents, which are closely related to the claims of the patents that the Federal Circuit has already concluded are obvious and invalid in view of the prior art, and will therefore reverse the jury verdict. As the Company believes a loss in this lawsuit is not probable after any and all challenges and appeals, no loss accrual has been recorded.

In assessing the probability of a loss, we considered, among other factors, our experience and the experience of other entities in similar cases, how we intend to respond to the lawsuit, and the opinions of internal and external legal counsel that a loss is not probable, but is reasonably possible. In view of these factors, the existence of the jury verdict, the possibility of needing to appeal the final judgment and other uncertainties, the Company believes that it is reasonably possible that a loss could occur in a range from zero to up to $114 million, exclusive of pre-judgment interest, post-judgment interest, and attorneys’ fees.

The Company recorded income tax expense of $38,643 in the 13-week period ended September 30, 2017, compared to income tax expense of $24,711 in the 13-week period ended September 24, 2016. The effective tax rate was 20.8% in the third quarter of 2017, compared to 16.5% in the third quarter of 2016. The 430 basis points increase to the third quarter of 2017 effective tax rate compared to the prior year quarter is primarily due to the Company’s election in February 2017 to align certain Switzerland corporate tax positions with evolving international tax initiatives, and shifts in projected income mix by jurisdiction, partially offset by the release of reserves related to uncertain tax positions due to the expiration of certain statutes of limitations during the third quarter of 2017.

The Company recorded an income tax benefit of $54,372 for the first three quarters of 2017, compared to income tax expense of $86,904 for the first three quarters of 2016. The effective tax rate was (10.8%) in the first three quarters of 2017, compared to 18.8% in the first three quarters of 2016. Excluding an income tax benefit of $168,755 due to revaluation of deferred tax assets, and the $7,275 expense due to the expiration of share-based awards (see Note 1 regarding the impacts of ASU 2016-09), the effective tax rate for the first three quarters of 2017 increased 250 basis points compared to the effective tax rate for the first three quarters of 2016. This remaining 250 basis point increase in effective tax rate was primarily due to the Company’s election in February 2017 to align certain Switzerland corporate tax positions with evolving international tax initiatives.

The Financial Accounting Standards Board ("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. Valuation is 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.

The method 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 fair value on a recurring basis are summarized below:

Marketable securities classified as available-for-sale securities are summarized below:

The Company’s investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities that have an unrealized loss shown in the table above, and it is not more likely than not that the Company will be required to sell a security before recovery of its amortized cost basis, which may be maturity.

The Company recognizes the credit component of other-than-temporary impairments of debt securities in "Other Income" and the noncredit component in "Other comprehensive income (loss)" for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During 2016 and the 39-week period ending September 30, 2017, the Company did not record any material impairment charges on its outstanding securities.

The amortized cost and fair value of the securities at an unrealized loss position at September 30, 2017 were $1,140,662 and $1,122,054 respectively. Approximately 59% of securities in our portfolio were at an unrealized loss position at September 30, 2017. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no material deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no material impairment has been recorded in the accompanying condensed consolidated statement of income.

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

The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of September 30, 2017 and December 31, 2016.

The amortized cost and fair value of marketable securities at September 30, 2017, 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 13, 2015, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $300,000 of the common shares of Garmin Ltd. The repurchases may be made from time to time as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The timing and amounts of any repurchases will be determined by the Company’s management depending on market conditions and other factors including price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. In December 2016, the Board of Directors authorized an extension through December 31, 2017 to purchase remaining common shares. As of September 30, 2017, the Company had repurchased 6,776 shares using cash of $299,169. There remains approximately $831 available to repurchase additional shares under this authorization.

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week and 39-week periods ended September 30, 2017:

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 39-week periods ended September 30, 2017:

Revenue from Contracts with Customers

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes previous revenue recognition guidance. The FASB has issued several standards amending or relating to ASU 2014-09 (collectively, the “new revenue standards”). The effective date of ASU 2014-09 is for fiscal years, and interim periods within those years, beginning on or after December 15, 2017. The Company does not intend to early adopt, and therefore will adopt in the Company’s fiscal year ending December 29, 2018. The Company plans to adopt the new revenue standards using the full retrospective method to restate each prior reporting period presented.

Our evaluation of the new revenue standards, as it relates to possible differences in the timing of revenue recognition for our contracts, is substantially complete. Based on our evaluation of the new revenue standards, our recognition will be consistent with our current accounting policies except for certain arrangements within the Company’s auto segment.

A portion of the Company’s auto segment contracts are currently accounted for under Accounting Standards Codification Topic 985-605 Software-Revenue Recognition (Topic 985-605). Under Topic 985-605, the Company defers all elements of multiple-element software arrangements if vendor-specific objective evidence of fair value (VSOE) cannot be established for an undelivered element (e.g. map updates). In applying the new revenue standards to certain contracts that include both software licenses and map updates, we will recognize the portion of revenue related to the software license at the time of delivery rather than ratably over the map update period.

Additionally, for certain multiple-element arrangements within the Company’s auto segment, the Company’s current policy is to allocate consideration to traffic services and recognize it ratably over the estimated life of the underlying product. Under the new revenue standards, we will recognize revenue related to certain traffic services at the time of hardware and/or software delivery. Specifically, the new revenue standards emphasize the timing of the Company’s performance, and upon delivery of the navigation device and/or software, the Company has performed its obligation with respect to the design and production of the product to receive and interpret the broadcast traffic signal for the benefit of the end user.

The changes in accounting policy described above will collectively result in reductions to deferred costs (asset) and deferred revenue (liability) balances and will accelerate the recognition of revenues and deferred costs in the auto segment going forward. The Company is currently finalizing its assessment of these impacts of the new revenue standards to the Consolidated Financial Statements. The new revenue standards require enhanced disclosures regarding contract assets and liabilities, and increased disaggregation of revenues, among other enhanced disclosure requirements. We are in the process of implementing changes to processes and internal controls for the new revenue standards.

Financial Instruments – Recognition, Measurement, Presentation, and Disclosure

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

Leases

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

Statement of Cash Flows

In August 2016, the FASB issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. The standard addresses eight specific cash flow issues with the objective of reducing diversity in practice. ASU 2016-15 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

Income Taxes

In October 2016, the FASB issued Accounting Standards Update No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory (“ASU 2016-16”), which requires recognition of the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. ASU 2016-16 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

Receivables – Nonrefundable Fees and Other Costs

In March 2017, the FASB issued Accounting Standards Update No. 2017-08, Receivables – Nonrefundable Fees and Other Costs (Topic 310-20): Premium Amortization on Purchased Callable Debt Securities (“ASU 2017-08”), which shortens the amortization period for certain callable debt securities held at a premium, requiring the premium to be amortized to the earliest call date. Callable debt securities held at a discount continue to be amortized to maturity. ASU 2017-08 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

On October 26, 2017, the Company acquired the shares of Navionics S.p.A., a privately held worldwide provider of electronic navigational charts and mobile applications for the marine industry. This acquisition was not material.

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 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 the Company’s assumptions prove incorrect or should unanticipated circumstances arise, 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, 2016. 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 website 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, 2016.

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, auto and aviation markets. The Company’s segments offer products through its 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 the Company’s results of operations as a percent of net sales during the periods shown (the table may not foot due to rounding):

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 segment table located in Note 4 to the Condensed Consolidated Financial Statements sets forth the Company’s results of operations (in thousands) including net sales, gross profit, and operating income for each of the Company’s five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, auto, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.

Comparison of 13-weeks ended September 30, 2017 and September 24, 2016

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

Net Sales

Net sales increased 3% for the 13-week period ended September 30, 2017 when compared to the year-ago quarter. The outdoor, aviation, marine, and fitness segments collectively increased by 9%, contributing 75% of total revenue. Auto was the largest portion of our revenue mix at 25% in the third quarter of 2017 compared to 30% in the third quarter of 2016.

Total unit sales decreased to 3,492 in the third quarter of 2017 from 3,848 in the same period of 2016.

Auto segment revenue decreased 12% from the year-ago quarter, primarily due to the ongoing PND market contraction. Revenues in the fitness segment decreased 12% from the year-ago quarter driven by the general decline of the basic activity tracker market and the timing of product introductions. The marine increase of 10% is primarily due to strong chartplotter and fishfinder sales in the current quarter. Revenues in the outdoor segment increased 31% from the year-ago quarter primarily driven by significant growth in the wearable category. Aviation revenues increased 16% when compared to the year-ago quarter, driven by both strong aftermarket and OEM sales.

Cost of Goods Sold

Third quarter 2017 cost of goods sold was $6.9 million or 2% lower than the prior year quarter. This decrease in cost of goods sold dollars, combined with the increase in revenues discussed above, resulted in a 220 basis point decrease in cost of goods sold as a percent of revenues compared to the year-ago quarter.

In the auto segment, the decline in cost of goods sold was largely consistent with the segment revenue declines. In the marine segment, the increase in cost of goods sold was largely consistent with the segment revenue increases. In the outdoor and fitness segments, the decreases in cost of goods sold as a percent of revenue resulted from a shift in product mix toward higher margin products.  In the aviation segment, the increase in cost of goods as a percentage of revenue resulted primarily from slightly increased warranty costs compared to the year-ago quarter.

Gross Profit

Gross profit dollars in the third quarter of 2017 increased 7% while gross margin increased 220 basis points compared to the third quarter of 2016. Gross margin remained relatively flat across all segments, except for fitness and aviation, which increased and decreased, respectively, as discussed above.

Advertising Expense

Advertising expense decreased 2% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The overall decrease in absolute dollars was driven primarily by decreases cooperative advertising, partially offset by an increase in outdoor media.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 5% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The outdoor and aviation segment increases were relatively flat as a percent of revenues. The increase as a percent of revenues in the fitness segment was primarily attributable to information technology and selling-related costs. The auto segment increase as a percent of revenues, and the marine segment decrease as a percent of revenues are primarily due to legal related costs.

Research and Development Expense

Research and development expense increased 11% primarily due to engineering personnel costs related to our wearable product offerings and aviation. In absolute dollars, research and development costs increased $13.2 million when compared with the year-ago quarter and increased 130 basis points as a percent of revenue. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

Operating Income

Operating income increased 6% in absolute dollars and increased 70 basis points as a percent of revenue when compared to the third quarter of 2016. The growth in operating income on an absolute dollar and percent of revenue basis resulted from revenue growth and an increase in gross margin percent, partially offset by increased operating expenses as a percent of revenue, as discussed above.

Other Income (Expense)

The average return on cash and investments during the third quarter of 2017 was 1.6% compared to 1.5% during the same quarter of 2016. Interest income increased primarily due to slightly higher yields on fixed-income securities.

Foreign currency gains and losses for the Company are typically driven by movements in the Taiwan Dollar, Euro, and British Pound Sterling in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation, the U.S. Dollar is the functional currency of Garmin (Europe) Ltd., and the Euro is the functional currency of most of our other European subsidiaries, although some transactions and balances are denominated in British Pounds. The majority of the Company’s consolidated foreign currency gain or loss is typically driven by the significant cash and marketable securities, receivables and payables held in a currency other than the functional currency at a given legal entity. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, Euro, and British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

The $8.6 million currency gain recognized in the third quarter of 2017 was primarily due to the weakening of the U.S. Dollar against the Euro and the British Pound Sterling, partially offset by the U.S. Dollar weakening against the Taiwan Dollar within the 13-weeks ended September 30, 2017. During this period, the U.S. Dollar weakened 3.4% against the Euro and 2.8% against the British Pound Sterling, resulting in gains of $8.0 million and $0.7 million, respectively, while the U.S. Dollar weakened 0.3% against the Taiwan Dollar, resulting in a loss of $1.6 million. The remaining net currency gain of $1.5 million was related to other currencies and timing of transactions.

The $19.4 million currency loss recognized in the third quarter of 2016 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar within the 13-weeks ended September 24, 2016. During this period, the U.S. Dollar weakened 3.5% against the Taiwan Dollar, resulting in a loss of $20.9 million, while the U.S. Dollar weakened 1.0% against the Euro, resulting in a gain of $2.6 million. The remaining net currency loss of $1.1 million was related to other currencies and timing of transactions.

Income Tax (Benefit) Provision

The Company recorded income tax expense of $38.6 million in the 13-week period ended September 30, 2017, compared to income tax expense of $24.7 million in the 13-week period ended September 24, 2016. The effective tax rate was 20.8% in the third quarter of 2017, compared to 16.5% in the third quarter of 2016. The 430 basis points increase to the third quarter of 2017 effective tax rate compared to the prior year quarter is primarily due to the Company’s election in February 2017 to align certain Switzerland corporate tax positions with evolving international tax initiatives, and shifts in projected income mix by jurisdiction, partially offset by the release of reserves related to uncertain tax positions due to the expiration of certain statutes of limitations during the third quarter of 2017.

Net Income