10-K 1 v367065_10k.htm ANNUAL REPORT
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2013
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from            to          
Commission file number 0-31983
 
GARMIN LTD.
(Exact name of registrant as specified in its charter)
 
 
 
Switzerland
98-0229227
(State or other jurisdiction
(I.R.S. Employer Identification No.)
of incorporation or organization)
 
Mühlentalstrasse 2
 
8200 Schaffhausen
N/A
Switzerland
(Zip Code)
(Address of principal executive offices)
 
Registrant’s telephone number, including area code: +41 52 630 1600
 
Securities registered pursuant to Section 12(b) of the Act:
 
Registered Shares, CHF 10.00 Per Share Par Value
NASDAQ Global Select Market
(Title of each class)
(Name of each exchange on which registered)
 
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO ¨
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO þ
 
Indicate by check mark whether the registrant (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 registrant 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 website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer þ
Accelerated Filer ¨
Non-accelerated Filer ¨
Smaller reporting company ¨
(Do not check if a 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
 
Aggregate market value of the common shares held by non-affiliates of the registrant as of June 29, 2013 (based on the closing price of the registrant's common shares on the Nasdaq Stock Market for that date) was $4,587,922,161.
 
Number of shares outstanding of the registrant’s common shares as of February 13, 2014:
Registered Shares, CHF 10.00 par value – 208,077,418 (including treasury shares)
Documents incorporated by reference:
Portions of the following document are incorporated herein by reference into Part III of the Form 10-K as indicated:
 
 
Part of Form 10-K into
Document
 
which Incorporated
Company's Definitive Proxy Statement for the 2014 Annual Meeting of Shareholders which will be filed no later than 120 days after December 28, 2013.
 
Part III
 
 
 
Garmin Ltd.
 
2013 Form 10-K Annual Report
 
Table of Contents
 
 
Cautionary Statement With Respect To Forward-Looking Comments
3
 
 
 
 
Part I
 
 
 
 
Item 1.
Business
3
Item 1A.
Risk Factors
17
Item 1B.
Unresolved Staff Comments
28
Item 2.
Properties
28
Item 3.
Legal Proceedings
29
Item 4.
Mine Safety Disclosures
34
 
Executive Officers of the Registrant
34
 
 
 
 
Part II
 
 
 
 
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
35
Item 6.
Selected Financial Data
36
Item 7.
Management's Discussion and Analysis of Financial Condition and Results of Operations
38
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
58
Item 8.
Financial Statements and Supplementary Data
60
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
93
Item 9A.
Controls and Procedures
93
Item 9B.
Other Information
95
 
 
 
 
Part III
 
 
 
 
Item 10.
Directors, Executive Officers and Corporate Governance
96
Item 11.
Executive Compensation
97
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
97
Item 13.
Certain Relationships and Related Transactions, and Director Independence
98
Item 14.
Principal Accounting Fees and Services
98
 
 
 
 
Part IV
 
 
 
 
Item 15.
Exhibits, Financial Statement Schedules
99
 
Signatures
105
 
 
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CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS
 
The discussions set forth in this Annual Report on Form 10-K contain statements concerning potential future events.  Such forward-looking statements are based upon assumptions by the Company's management, as of the date of this Annual Report, including assumptions about risks and uncertainties faced by the Company. In addition, management may make forward-looking statements orally or in other writings, including, but not limited to, in press releases, in the annual report to shareholders and in the Company’s other filings with the Securities and Exchange Commission. 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. Forward-looking statements include any discussion of the trends and other factors that drive our business and future results in “Item 7.  Management’s Discussion and Analysis of Financial Conditions and Results of Operations.”   Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. If any of management's assumptions prove incorrect or should unanticipated circumstances arise, the Company's 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 under Item 1A “Risk Factors.”  Readers are strongly encouraged to consider those factors when evaluating any forward-looking statements concerning the Company.  The Company does not undertake to update any forward-looking statements in this Annual Report to reflect future events or developments.
 
Part I
 
Item 1.    Business
 
This discussion of the business of Garmin Ltd. ("Garmin" or the "Company") should be read in conjunction with, and is qualified by reference to, “Management's Discussion and Analysis of Financial Condition and Results of Operations” under Item 7 herein and the information set forth in response to Item 101 of Regulation S-K in such Item 7 is incorporated herein by reference in partial response to this Item 1.  Garmin has identified five operating segments for external reporting purposes:  Auto/Mobile, Aviation, Marine, Outdoor and Fitness.  There are three operating segments (Auto PND, Auto OEM and Mobile) that are not reported separately but are aggregated within the Auto/Mobile reportable segment.  Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker (CODM), who allocates resources and assesses performance of each segment individually.  The segment and geographic information included in Item 8, “Financial Statements and Supplementary Data,” under Note 8 is incorporated herein by reference in partial response to this Item 1.
 
Garmin was incorporated in Switzerland on February 9, 2010 as successor to Garmin Ltd., a Cayman Islands company (“Garmin Cayman”). Garmin Cayman was incorporated on July 24, 2000 as a holding company for Garmin Corporation, a Taiwan corporation, in order to facilitate a public offering of Garmin Cayman shares in the United States. On June 27, 2010, Garmin became the ultimate parent holding company of the Garmin group of companies pursuant to a share exchange transaction effected for the purpose of changing the place of incorporation of the ultimate parent holding company of the Garmin group from the Cayman Islands to Switzerland (the “Redomestication”).  Pursuant to the Redomestication, all issued and outstanding Garmin Cayman common shares were transferred to Garmin and each common share, par value U.S. $0.005 per share, of Garmin Cayman was exchanged for one registered share, par value 10 Swiss francs (CHF) per share, of Garmin.  Garmin owns, directly or indirectly, all of the operating companies in the Garmin group. 
 
Garmin’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statement and Forms 3, 4 and 5 filed by Garmin’s directors and executive officers and all amendments to those reports will be made available free of charge through the Investor Relations section of Garmin’s website (http://www.garmin.com) as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).  The SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
 
 
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The reference to Garmin’s website address does not constitute incorporation by reference of the information contained on this website, and such information should not be considered part of this report on Form   10-K.
 
Company Overview
 
Garmin is a leading, worldwide provider of navigation, communication and information devices and applications, many of which are enabled by Global Positioning System (GPS) technology. Garmin designs, develops, manufactures and markets a diverse family of hand-held, portable and fixed-mount GPS-enabled products and other navigation, communications and information products for the automotive/mobile, outdoor, fitness, marine, and general aviation markets.  
 
Overview of the Global Positioning System
 
The Global Positioning System is a worldwide navigation system which enables the precise determination of geographic location using established satellite technology. The system consists of a constellation of orbiting satellites. The satellites and their ground control and monitoring stations are maintained and operated by the United States Department of Defense, which maintains an ongoing satellite replenishment program to ensure continuous global system coverage.   Access to the system is provided free of charge by the U.S. government.
 
Prior to May 2000, the U.S. Department of Defense intentionally degraded the accuracy of civilian GPS signals in a process known as Selective Availability (SA) for national security purposes. SA variably degraded GPS position accuracy to a radius of 100 meters. On May 2, 2000, the U.S. Department of Defense discontinued SA. In a presidential policy statement issued in December 2004, the Bush administration indicated that the U.S. does not intend to implement SA again and is committed to preventing hostile use of GPS through regional denial of service, minimizing the impact to peaceful users. With SA removed, a GPS receiver can calculate its position to an accuracy of approximately 10 meters or less, enhancing the utility of GPS for most applications.
 
The accuracy and utility of GPS can be enhanced through augmentation techniques which compute any remaining errors in the signal and broadcast these corrections to a GPS device. The Federal Aviation Administration (“FAA”) has developed a Wide Area Augmentation System (WAAS) comprising ground reference stations and additional satellites that improve the accuracy of GPS positioning available in the United States and most of Canada and Mexico to approximately 3 meters. WAAS supports the use of GPS as the primary means of enroute, terminal and approach navigation for aviation in the United States. The increased accuracy offered by WAAS also enhances the utility of WAAS-enabled GPS receivers for consumer applications. The FAA announced on July 11, 2003 that the WAAS system had achieved initial operating capability and that the system was available for instrument flight use with appropriately certified avionics equipment. Since that time, the FAA has installed additional ground reference stations and has launched additional WAAS satellites.
 
Japan’s MTSAT-based Satellite Augmentation System (MSAS) achieved initial operating capability for en route, terminal and approach navigation for aviation on September 27, 2007.  The European Geostationary Navigation Overlay Service (EGNOS) aviation Safety of Life (SoL) service achieved initial operating capability for en route, terminal, and approach navigation on March 2, 2011.
 
Recent Developments in the Company’s Business
 
Since the inception of its business, Garmin has delivered over 126 million products, which includes the delivery of almost 14 million products during 2013. 
 
 
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Automotive/Mobile Product Introductions
 
In January 2013 Garmin announced the 2013 line of nüvi® personal navigation devices. New features in the 2013 line include Garmin Real Directions™ which guides drivers by telling them to turn at recognizable landmarks, buildings, stop signs and traffic lights, and Active Lane Guidance which features voice prompts and visual lane animation. In addition, the 2013 line of nüvis feature an all new design and larger screens that range from 4.3 to 7 inches.
 
In June 2013 Garmin announced the RV 760LMT, which is Garmin’s first navigator created specifically for the RV lifestyle.   The RV 760LMT comes with a large 7” display,  detailed maps for the U.S. and Canada that include RV-related restrictions, such as bridge heights, for most major roads and highways, and a directory of nearly 20,000 RV parks and services in the U.S. and Canada.
 
During 2013 Garmin also introduced HUD, which is Garmin’s first portable head-up display for smartphone navigation apps. HUD projects navigation directions onto a transparent film on the vehicle’s windshield or an attached reflector lens for the driver’s easy viewing. 
 
Outdoor Product Introductions
 
In June 2013 Garmin announced Monterra™, which is Garmin’s first Wi-Fi enabled outdoor handheld GPS that combines Garmin’s location and mapping capabilities and the Android™ operating system.  It has a sunlight-readable touchscreen and users can access the Google Play Store™ and download apps on the device.
 
Garmin expanded its line of products for golfers in 2013 with the introduction of the Approach® S4 touchscreen GPS golf watch that comes preloaded with 30,000 worldwide golf courses and provides enhanced battery performance and the ability to display emails, text messages and alerts.
 
In August 2013, Garmin announced VIRB™, its first HD 1080p action camera series.  VIRB has a 1.4 inch Chroma display, digital image stabilization and lens distortion correction, and it can take high quality still photographs while the video camera is recording.  VIRB Elite incorporates all of these features and adds built-in Wi-Fi, data sensors and a high-sensitivity GPS receiver.
 
In October 2013 Garmin announced tactix™, which is a rugged high-sensitivity GPS navigator inspired by the requirements of law enforcement and police special operations.   It includes an altimeter, barometer, 3-axis compass and extensive tracking capabilities.
 
Garmin expanded its line of Delta™ training collars for dogs during 2013 with the introduction of Delta Upland, which is a highly versatile system for sporting dogs that combines an electronic training collar, a Bark Limiter, and a remote beeper to help locate dogs that are out of sight.         
 
Fitness Product Introductions
 
Garmin expanded its line of Forerunner® running watches in 2013 with the introduction of the Forerunner 620 and Forerunner 220.  Both models have a one-inch Chroma color display, and the Forerunner 620 offers advanced features like recovery advisor, race predictor and VO2 max estimate.  Garmin also expanded its line of Edge® cycling computers during 2013 with the introduction of Edge Touring and Edge Touring Plus, which are GPS navigators designed for touring cyclists, commuters, and mountain bikers.
 
In August 2013 Garmin announced the availability of Vector™, which is a high-precision pedal-based power meter designed specifically for cyclists.  It provides power data and measures and presents right and left leg power balance to ANT+™ compatible devices.
 
Marine Product Introductions
 
In February 2013 Garmin announced the GPSMAP® 8000 series.   The GPSMAP 8000 Glass Helm series provides a fully integrated glass display and a flat-mounting option that transforms the vessel’s bridge into a glass helm.   In November 2013 Garmin announced Garmin Helm, which is a free mobile application that allows boaters to view and control their multi-function Garmin chartplotters from their mobile device.  Also in February 2014  Garmin introduced LakeVü™ HD and LakeVü HD Ultra, Garmin’s most detailed lake cartography ever created , as well as DownVü™ and SideVü™, which is Garmin’s down and side-scanning sonar technology that provides high resolution imagery.  
 
 
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In November 2013 Garmin announced the GPSMAP 800 and 1000 series of combination chartplotter and fishfinder products.   The GPSMAP 800 has an 8-inch display, and the GPSMAP 1000 has a 10-inch display.  Both are equipped with built-in 1kW traditional sonar capability, built-in CHIRP and DownVü and support for SideVü with CHIRP. 
 
Garmin introduced the quatix™ during 2013, which is Garmin’s first GPS watch designed for mariners, both power and sail. The quatix combines pivotal marine features and provides both navigation and sailing capabilities while integrating Garmin’s GPS technology and interface.
 
Aviation Product Introductions
 
During 2013 Garmin introduced a new series of aviation VHF COM and NAV/COM radios, called the GTR and GNC series.  Garmin also introduced the GRA 5500, which is a high-performance, all-digital radar altimeter for transport category, helicopter, business and general aviation aircraft.
 
 In March 2013 Garmin announced seven new, affordable products for experimental and light sport aircraft that offer enhanced capabilities, reduced weight and simplified installation.  In July 2013 Garmin enhanced its experimental and light sport aircraft offerings with the GTR™ 200 panel mount communication radio. 
 
Garmin announced D2™ in October 2013, which is a premium watch designed specifically for aviators.
 
Products
 
Garmin offers a broad range of solutions across its reportable segments as outlined below.  In general, Garmin believes that its products are known for their value, high performance, ease of use, innovation, and ergonomics. 
 
Automotive/Mobile
 
Garmin offers a broad range of automotive navigation products, as well as a variety of products and applications designed for the mobile GPS market.  Garmin currently offers to consumers around the world:
 
Personal Navigation Devices (PND) –
 
PNDs combine a full-featured GPS navigator (with built-in maps) with Garmin’s uniquely simple user interface.  PNDs are sold under the nüvi, zūmo®, dezl™, and fleet™ brand names.  The zūmo series offers motorcycle-specific features, the dezl series offers over-the-road trucking features while the fleet series delivers an integrated tracking and dispatch fleet system.  Across the expansive product portfolio, Garmin offers features such as wide screen displays, integrated traffic receivers for traffic avoidance (including some models with lifetime traffic updates), bundled lifetime map updates, spoken street names, voice activated navigation, speed limit indication, lane assist with PhotoReal junction views - thousands of high quality photos of actual upcoming junctions, 3-D building view, and Bluetooth® hands-free capability.  In fiscal years 2013, 2012 and 2011, the nüvi class of products represented approximately 34%, 43%, and 48% of Garmin’s total consolidated revenues, respectively.
 
 
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Mobile Applications –
 
Garmin offers mobile applications under the following brand names:  StreetPilot® and NAVIGON®.  The applications are offered across a broad range of smartphones and tablets including iOS, Android and Windows enabled devices.  These applications provide users turn-by-turn, voice-prompted directions and other advanced Garmin navigation features including Reality View Pro junction information and traffic information.  Some are offered as onboard solutions in which mapping is downloaded to the user’s device and always available while some are offboard solutions in which mapping is available via a server utilizing the mobile connectivity of the device.
 
Outdoor
 
                Garmin offers a broad range of products designed for use in outdoor activities.  Garmin currently offers to consumers around the world:
 
Outdoor Handhelds –
 
Outdoor handhelds range from basic waypoints navigation capabilities to advanced color touchscreen devices offering barometric altimeter, 3-axis compass, camera, microSD™ card slot for optional customized maps and other features.  Outdoor handhelds are sold under the Dakota®, Oregon®, Rino®, Montana™, Monterra, eTrex®, and GPSMAP® brand names.  Each series of products is designed to serve various price points and niche activity categories.  The Rino series of handhelds additionally offers two-way Family Radio Service (FRS) and General Mobile Radio Service (GMRS) that integrate two-way voice communications.  The Monterra is Garmin’s first Wi-Fi enabled, Android-based outdoor handheld GPS.
 
Wrist-worn Devices-
 
Garmin offers GPS wrist watches for outdoor activity, as well as military, law enforcement and special operations.  The fenix™ provides comprehensive navigation and tracking functionalities, as well as trip information, such as heading, elevation and weather changes.   The tactix adds additional features inspired by the requirements of law enforcement and police special operations.
 
Golf Devices -
 
The Approach® series of golf-focused devices includes both handhelds and wrist-worn products with up to 30,000 preloaded worldwide golf courses.  The offerings range from basic display of yardages to the front, back and middle of greens to advanced, touchscreen devices providing measurement of individual shot distances and display of the exact yardage to fairways, hazards and greens.  A statistic-tracking feature allows users to track and analyze their golf statistics.  Some devices include manual pin positioning, which allows users to tap and drag the flag on the green for precise yardage to the flag, and the ability to display emails, text messages and alerts.
 
Dog Tracking and Training/Pet Obedience Devices -
 
Garmin offers a series of dog-focused products providing a range of functionality including GPS-enabled dog tracking, electronic dog training, and electronic bark correction.  The products are offered under the Astro®, Alpha™, Bark Limiter™ and Delta™ brand names.  The Astro series can pinpoint up to ten dogs’ positions at one time through all-weather collars and a handheld system, which features many of our outdoor capabilities including:  barometric altimeter, electronic compass, microSD slot, area calculator and a waterproof exterior.  Alpha combines the tracking capabilities of Astro with electronic dog training.   The Bark Limiter is an intuitive electronic bark correction device.  The Delta series of training collars offers a remote training device without tracking capability.
 
 
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Action Cameras -
 
Garmin offers VIRB™ and VIRB Elite, HD 1080p action cameras.  VIRB has a 1.4 inch Chroma display, digital image stabilization and lens distortion correction, and it can take high quality still photographs while the video camera is recording.  VIRB Elite incorporates all of these features and adds built-in Wi-Fi, data sensors and a high-sensitivity GPS receiver.
 
Fitness
 
                Garmin offers a broad range of products designed for use in fitness and wellness activities.  Garmin currently offers to consumers around the world:
 
Running/Multi-Sport Watches –
 
The Forerunner® series offers compact, lightweight training assistants for athletes with integrated GPS sensor that provide time, speed, distance, pace and other data. Some models also offer a heart rate monitoring function and heart-rate based calorie computation.  All models allow runners to upload their data to Garmin Connect™, where they can store, analyze and share their workout data. Additional advanced features include: Virtual Racer™, which allows runners to race against their previous best times, recovery advisor, race predictor and VO2 max estimate. The Forerunner 310XT and 910XT are designed specifically for triathletes.  These all-in-one GPS-enabled devices provide detailed swim metrics and track distance, speed/pace, elevation and heart rate for running and cycling.
 
Cycling Computers -
 
The Edge® series measures speed, distance, time, calories burned, climb and descent, and altitude offering an integrated personal training system designed for cyclists.  In addition, Garmin offers devices geared toward performance-driven cyclists offering real-time connectivity through a smartphone, providing live tracking, social media sharing and real-time weather updates.
 
Cycling Power Meter -
 
Garmin offers Vector™, which is a high-precision pedal-based power meter designed specifically for cyclists.  It provides power data and measures and presents right and left leg power balance to ANT+™ compatible devices.
 
Swimming Watch -
 
Garmin Swim™ is a watch designed for swimming pool use and allows users to track stroke type, stroke count, distance, pace and lengths.   Users can also upload their swim data to Garmin Connect, where they can store, analyze and share the data.
 
Wellness Devices -
 
Garmin has introduced vívofit™ and vívoki™ to address the growing wellness monitoring market.  The vívofit fitness band provides a personalized daily goal, tracks progress and reminds users when it’s time to move. The device features a curved display that shows steps, goal countdown, calories, distance, time of day and heart rate when paired with a monitor.  Vívoki provides similar tracking capabilities in a small form factor that lacks a display.  This offering is designed to be a lower cost solution for corporate wellness programs.  Both devices pair with Garmin Connect to offer analysis and tracking.
 
 
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Garmin Connect –
 
Garmin Connect is a web-based analytic tool where users can store, analyze and share fitness and wellness data. The companion mobile application also provides real-time weather data and allows users to wirelessly download courses to some devices.
 
Marine 
 
Garmin offers a broad range of products designed for use in the recreational marine industry.  Garmin currently offers to consumers around the world:
 
Chartplotters and Multi-Function Displays (MFDs) -
 
Garmin offers numerous chartplotters/MFDs under the GPSMAP® brand name.  The offerings range from 4-inch helm-mounted products to 15-inch fully-integrated Glass Helm offerings.  Cartography options range from US coastal and lake mapping to worldwide basemaps to highly detailed BlueChart® g2 Vision™ charts offering high-resolution satellite imagery, 3-D map perspective and aerial reference photos to LakeVü HD and LakeVü HD Ultra, Garmin’s most detailed lake cartography ever created.  Additional advanced features and connectivity available include:  Garmin’s G Motion technology, which delivers ultra-smooth map panning and zooming, optional wireless remote and a wireless mouse and expanded “plug-and-play” access to onboard sensors, with NMEA 2000 and Garmin Marine Network connectivity (the Garmin Marine Network is a system that combines GPS, radar, XM WX Satellite Weather, sonar, and other data). 
 
Fishfinders –
 
Garmin offers two series of fishfinders.  The echo™ series are standalone fishfinders ranging from grayscale displays to the highest-end echo 550C, which features a video-quality 640x480 pixel 5-inch VGA screen, a powerful 500-watt sonar transmitter, and offers fish arch display and bottom tracking as deep as 1,900 feet.  The echoMap™ series provides charplotter and fishfinder capabilities in a single device.
 
Sounders –
 
Garmin offers “black-box” sounders which interface with Garmin MFDs to enhance their utility by providing the depth sounder and fish finder functions in a remote mounted package. 
 
Autopilot Systems -
 
Garmin offers full-featured marine autopilot systems designed for sailboats and powerboats.  The systems incorporate such features as: Garmin’s patented Shadow Drive™ technology, which automatically disengages the autopilot if the helm is turned, remote steering and speed control, and integration with the Volvo Penta IPS steering and propulsion system. Garmin has also introduced steer-by-wire autopilot capabilities for various steering systems.
 
Radar -
Garmin offers both radomes and open array radar products with compatibility to any network-compatible Garmin chartplotter so that the chartplotter can double as the radar screen.  The Garmin radar solutions have a nautical mile range of 36-72 nm.
 
 
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Instruments -
 
Garmin offers NMEA 2000 and NMEA 0183 compliant instrument displays that show data from multiple remote sensors on one screen.  Mariners can display instrument data such as depth, speed through the water, water temperature, fuel flow rate, engine data, fuel level, wind direction and more, depending upon what sensors are connected.
 
Radios -
 
Garmin provides marine radios with differing feature sets for the radio needs of all types of mariners.  The entry-level radio is NMEA 0183 compatible, while the premium radio is designed for 35+ foot boats, is NMEA 2000 and NMEA 0183 compatible, offers multi-station support, and monitors all AIS channels at the same time. 
 
Handhelds and Wrist-worn Devices –
 
Garmin offers a marine-friendly GPS handheld featuring a 3-axis tilt-compensated electronic compass, wireless data transfer between compatible units and preloaded cartography for the coastal United States.  Also offered for mariners is the quatix™, Garmin’s first GPS watch designed for mariners, combining marine features and navigation and sailing capabilities while integrating Garmin’s GPS technology and interface.
 
Sailing
 
In September 2012, Garmin acquired Nexus Marine AB, a leading supplier of instrumentation for the sailing and yachting market.   Nexus designs and manufactures sailing instrumentation systems, and it also supplies binoculars, accessories and Silva branded marine compasses.
 
Aviation
 
Garmin’s aviation product line includes GPS-enabled navigation, VHF communications transmitters/receivers, multi-function displays, electronic flight instrumentation systems (EFIS), automatic flight control systems, traffic advisory systems and traffic collision avoidance systems, terrain awareness and warning systems, instrument landing system (ILS) receivers, surveillance products,  audio panels, cockpit datalink systems and more.  The list below includes a sampling of some of the aviation capabilities currently offered by Garmin:
 
Integrated Avionics Systems/Flight Decks - 
 
Garmin offers a range of integrated glass avionics from the G3X™ for the experimental and light-sport aircraft market to the G5000™ for the business jet market.  Basic capabilities integrated include: navigation, communication, attitude, weather, terrain, traffic, surveillance and engine information on large high-resolution color displays.  More advanced features include:  Garmin’s 3-D synthetic vision technology (SVT™), weather, Garmin’s electronic stability and protection system (ESP), electronic flight charts and touchscreen controls, which utilize patent pending, infrared touchscreen technology, audio and visual feedback, and animation to help pilots know exactly how the system is responding to their input.
 
 
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Garmin offers similar integrated glass avionics for the helicopter market through the G500H, G1000H® and G5000H®.  Basic and advanced capabilities are similar to those offered to the aircraft market.  The helicopter offerings have been optimized for rotorcraft and offer features like helicopter synthetic vision technology (HSVT™), helicopter-specific databases with over 7,000 heliports and nearly 30,000 additional low-altitude obstacles, XM WX Satellite Weather with NEXRAD, and the ability to display video from a forward looking infrared (FLIR) camera or other video sources.
 
Garmin also offers all-glass integrated avionics to the retrofit market through the G500 and G600.  These solutions provide electronic flight displays that work with separate Garmin avionics to provide essential information such as attitude, air data, weather, terrain and traffic.  In addition, upgraded systems also allow for the display and control of such data as altitude preselects and vertical speed, DME distance, analog radar altitude, and analog navigation data.
 
Panel-mount aviation products -
 
GPS/Navigation/Communication Solutions –
 
Garmin provides certified GPS navigation receivers, traditional VHF navigation receivers, instrument landing systems receivers and VHF communication transmitters/receivers. Features available in different GNC, GTR, GNS and GTN series models include 4-color map graphics, GPS, communication and navigation capabilities, touchscreen operation, graphical flight planning with vector airways and high-altitude jet routes, remote transponder, remote audio control, SafeTaxi® and electronic chart capabilities.  Helicopter Terrain Awareness and Warning System (HTAWS) is an option providing graphical and audible alerts of potential terrain and obstacle conflicts along the flight path.
 
Traffic Solutions -
 
Garmin offers traffic avoidance products combining active and passive surveillance data to pinpoint specific traffic threats. These capabilities are part of our GTS™ series of systems.  The systems use Garmin’s patent-pending CLEAR CAS™ technology and correlate automatic dependent surveillance broadcast (ADS-B) with radar targets.  The offerings include solutions for both the recreational and transport category of aircraft.
 
Audio Solutions - 
 
The GMA series are audio panels ranging from offerings with basic capabilities for the recreational pilot to advanced capabilities including voice recognition, 3D spatial audio processing, advanced auto squelch, ambient noise based volume adjustment and independent pilot/co-pilot communications capabilities.
 
Transponder Solutions -
 
Garmin provides a range of transponder solutions in the GTX™ series.  The FAA-certified transponders transmit altitude or flight identification to air traffic control radar systems or other aircraft’s air traffic avoidance devices.  Newer transponders offer data link capability, including local air traffic information at FAA radar sites equipped with Traffic Information Service (TIS) and a pathway to ADS-B compliance for the Next Generation airspace system, via transmission of traffic surveillance data such as aircraft flight ID, position, altitude, velocity, climb/descent, and heading information. Garmin offers solutions to both recreational and transport aircraft.
 
 
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ADS-B Solutions -
 
Garmin offers an FAA certified ADS-B product within the GDL® series.  Capabilities include GPS satellite navigation with datalink communications to deliver interactive traffic and hazard surveillance.
 
Weather Solutions -
 
Weather capabilities are delivered within our GDL, GSR and GWX™ series.  The solutions range from offering XM WX satellite real-time weather information to the aircraft via panel-mounted devices from Garmin to on-demand global weather information, text/voice communications and near real-time position tracking through the Iridium satellite network (subscription required).   Also available in the GWX series are all-in-one antenna/receiver/transmitters that bring real-time weather to Garmin’s multi-function displays and Integrated Avionics Systems, as well as advanced Doppler-enabled features.
 
Portable and Wrist-worn Solutions -
 
Garmin offers the aera® series and GPSMAP 695/696 as portable avionics solutions.  The aera series combines an aviation portable with a full-featured automotive GPS.  These touchscreen products come with automotive maps, a terrain/obstacles aviation database, and a patented instrument display.  Advanced features include: a digital document viewer, a scratch pad, pre-loaded geo-referenced charts, and XM radio and weather.  The GPSMAP series offers detailed electronic charts, airways and IFR map mode. Other features available include:  XM radio and XM WX Satellite Weather.  Garmin announced D2™ in October 2013, which is a premium watch designed specifically for aviators.
 
Mobile Application -
 
Garmin Pilot™ is a premium flight planning, flight plan filing, and pre-flight weather application for display on iOS and Android-based mobile devices.  It provides instant access to comprehensive U.S. and Canada weather data, winds and temperature aloft, and lightning data.
 
Sales and Marketing
 
Garmin’s non-aviation products are sold in approximately 100 countries through a worldwide network of approximately 4,000 independent dealers and distributors, who meet our sales and customer service qualifications. No single customer’s purchases represented 10% or more of Garmin’s consolidated revenues in the fiscal year ended December 28, 2013.  Marketing support is provided geographically from Garmin’s offices around the world.  Garmin’s distribution strategy is intended to increase Garmin’s global penetration and presence while maintaining high quality standards to ensure end-user satisfaction.
                                   
Garmin’s U.S. consumer product sales are handled through its network of dealers and distributors who are serviced by a staff of regional sales managers and in-house sales associates. Garmin’s Europe, Middle East, Australia/New Zealand and Africa consumer product sales are handled through our in-country subsidiaries or local distributors who resell to dealers. Working closely with Garmin’s in-house sales and marketing staff in the U.K. and U.S., these in-country subsidiaries or independent distributors are responsible for inventory levels and staff training requirements at each retail location. Garmin’s Taiwan-based marketing team handles the Company’s Asia sales and marketing effort.  Some of Garmin’s larger consumer products dealers and distributors include:
 
·
Amazon.com—internet retailer;
·
Best Buy—one of the largest U.S. and Canadian electronics retailers;
·
Costcoan international chain of membership warehouses that carry quality, brand name merchandise;
·
Halford’s—a large European retailer specializing in car parts and accessories; and
·
Wal-Mart—the world’s largest mass retailer.
 
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Garmin’s retrofit avionics and aviation portable products are sold through select aviation distributors around the world and, in the case of aviation portable products, also through catalogs and pilot shops.  Garmin’s largest aviation distributors include Aircraft Spruce & Specialty Co., Elliott Aviation, Gulf Coast Avionics Corp., Sarasota Avionics, and Sportsman’s Market.  Avionics distributors have the training, equipment and certified staff required for at-airport installation of Garmin’s avionics equipment.
 
In addition to the traditional distribution channels mentioned, Garmin has many relationships with original equipment manufacturers (OEMs).  In the automotive/mobile segment, Garmin’s products are sold globally to automotive and motorcycle OEMs, either directly or through tier 2 sourcing.  Some of Garmin’s larger OEM relationships include Chrysler, Suzuki, Volkswagen, Harley-Davidson, BMW Motorrad, Mercedes Benz, Bombardier, and Polaris.  In the marine segment, Garmin’s products are standard equipment on various models of boats.  Some of the larger OEM relationships include Ranger Tugs, Cutwater Boats (a Division of Fluid Motion, LLC), Bayliner Boats (a division of Brunswick Corporation), Bavaria Yacht, Chaparral Boats, Inc., Andros Boats, Inc., Edgewater Boats, LLC, Bennington Marine, LLC, Cigarette Racing Team, LLC, Cobalt Boats, LLC, G3 Boats (a division of Yamaha Motor Corp.), Gulf Craft, Inc., Fairline Boats, Ltd., Inha Works Ltd. and Regal Marine Industries, Inc.  In the aviation market, Garmin’s avionics are either standard equipment or options on various models of aircraft.  Some of the larger OEM relationships include AgustaWestland, Bombardier, Bell Helicopter Textron, Inc., Cessna Aircraft Company, Cirrus Aircraft, Embraer SA, Eurocopter, an EADS Company, Beechcraft Corporation, Pilatus Aircraft Ltd, Piper Aircraft, Inc., Quest Aircraft Company, and Robinson Helicopter Company. 
 
Competition
 
In general, we operate in highly competitive markets though competitive conditions do vary among our diverse products and geographies.  Garmin believes the principal competitive factors impacting the market for its products are design, functionality, quality and reliability, customer service, brand, price, time-to-market and availability.  Garmin believes that it generally competes favorably in each of these areas and as such, is generally a significant competitor in each of our major markets.
 
Garmin believes that its principal competitors for portable automotive products are TomTom N.V. and MiTAC Digital Corporation (MiTAC) (which distributes products under the brand names of Magellan, Mio, and Navman). Garmin believes that its principal competitors for outdoor product lines are Bushnell, Delorme, Lowrance Electronics, Inc., a subsidiary of Navico (“Lowrance”) Magellan, a subsidiary of MiTAC, and Woodman Labs Inc. dba GoPro. For mobile products Garmin believes that its principal competitors are Google In., Apple Inc. and Telenav Inc. Garmin believes that its principal competitors for fitness products are Bryton Corp., Fitbit Inc., Nike, Inc., Polar Electro Oy, Sigma Sports, Suunto Oy and Timex Corp. For marine products, Garmin believes that its principal competitors are Furuno Electronic Company, the Humminbird division of Johnson Outdoors, Inc., Navico and Raymarine Inc. For Garmin’s aviation product lines, Garmin considers its principal competitors to be Aspen Avionics, Avidyne Corporation, Chelton Flight Systems, CMC Electronics, Free Flight Systems, Honeywell, Inc., L-3 Avionics Systems, Rockwell Collins, Inc., Sagem Avionics, Inc. and Universal Avionics Systems Corporation. 
 
Research and Development
 
Garmin’s product innovations are driven by its strong emphasis on research and development and the close partnership between Garmin’s engineering and manufacturing teams.  Garmin’s products are created by its engineering and development staff, which numbered 3,168 people worldwide as of December 28, 2013.  Garmin’s manufacturing staff includes manufacturing process engineers who work closely with Garmin’s design engineers to ensure manufacturability and manufacturing cost control for its products. Garmin’s development staff includes industrial designers, as well as software engineers, electrical engineers, mechanical engineers and cartographic engineers.  Garmin believes the industrial design of its products has played an important role in Garmin’s success.  Once a development project is initiated and approved, a multi-disciplinary team is created to design the product and transition it into manufacturing.
 
 
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Below is a table of Garmin’s expenditures on research and development over the last three fiscal years. 
 
 
 
December 28,
 
 
December 29,
 
 
December 31,
 
($'s in thousands)
 
2013
 
 
2012
 
 
2011
 
Research and development
 
$
364,923
 
 
$
325,773
 
 
$
298,584
 
Percent of net sales
 
 
13.9
%
 
 
12.0
%
 
 
10.8
%
 
Manufacturing and Operations
 
Garmin believes that one of its core competencies and strengths is its manufacturing capability at its Sijhih, Jhongli and LinKou, Taiwan facilities, its Olathe, Kansas facility, and its Salem, Oregon facility.  Garmin believes that its vertically integrated approach has provided it the following benefits with respect to all products other than a few select marine products (VHF radios and AIS receivers) and our accessory products, which are manufactured by one or more third parties.
 
Reduced time-to-market.  Utilizing concurrent engineering techniques, Garmin’s products are introduced to production at an early development stage and the feedback provided by manufacturing is incorporated into the design before mass production begins.  In this manner, Garmin attempts to reduce the time required to move a product from its design phase to mass production deliveries.
 
Design and process optimization.  Garmin uses its manufacturing resources to rapidly prototype design concepts, products and processes in order to achieve higher efficiency, improved quality and yields, lower cost and better value for customers.  Garmin’s ability to fully explore product design and manufacturing process concepts has enabled it to optimize its designs to minimize size and weight in GPS devices that are functional, waterproof, and rugged.
 
Logistical agility.   Operating our own manufacturing and distribution facilities helps Garmin minimize problems, such as component shortages and long component lead times which are common in the electronics industry.  Many products can be re-engineered to bypass component shortages or reduce cost and the new designs can be delivered to market quickly.  Garmin reacts rapidly to changes in market demand by striving to maintain a safety stock of long-lead components and by rescheduling components from one product line to another.  Operating our own manufacturing facilities also allows Garmin to quickly adjust the mix of product production, helping to foster faster delivery response to the customer.
 
Garmin’s design, manufacturing, distribution, and servicing processes in our US, Taiwan, and UK facilities are certified to ISO 9001, an international quality standard developed by the International Organization for Standardization. Garmin’s automotive operations in Taiwan and Olathe have also achieved TS 16949 certification, a quality standard for automotive suppliers.  In addition, Garmin’s aviation operations have achieved certification to AS9100, the quality standard for the aviation industry.
 
 Garmin International, Inc., Garmin (Europe) Ltd and Garmin Corporation have also achieved certification of their environmental management systems to the ISO14001 standard.  This certification recognizes that Garmin’s subsidiaries have systems and processes in place to minimize or prevent harmful effects on the environment and to strive continually to improve its environmental performance. 
 
Materials
 
Although most components essential to Garmin’s business are generally available from multiple sources, certain key components, including, but not limited to, microprocessors, certain liquid crystal displays (LCDs), and certain  application-specific integrated circuits (ASICs) are currently obtained by the Company from single or limited sources, which subjects Garmin to supply and pricing risks.  Many of these and other key components that are available from multiple sources, including, but not limited to, NAND flash memory, dynamic random access memory (DRAM), GPS chipsets and certain LCDs, are subject at times to industry-wide shortages and commodity pricing fluctuations.
 
 
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                Garmin and other participants in the personal computer, tablet, mobile communication, aviation electronics and consumer electronics industries also compete for various components with other industries that have experienced increased demand for their products.  In addition, Garmin uses some custom components that are not common to the rest of the personal computer, tablet, mobile communication and consumer electronics industries, and new products introduced by the Company often utilize custom components available from only one source until Garmin has evaluated whether there is a need for, and subsequently qualifies, additional suppliers. When a component or product uses new technologies, initial capacity constraints may exist until the suppliers’ yields have matured or manufacturing capacity has increased.  Garmin makes efforts to manage risks in these areas through the use of supply agreements for strategically important components.  Nevertheless, if  Garmin’s supply of a key single-sourced component for a new or existing product was delayed or constrained, if such components were available only at significantly higher prices, or if a key manufacturing vendor delayed shipments of completed products to Garmin, Garmin’s financial condition and operating results could be materially adversely affected. Garmin’s business and financial performance could also be adversely affected depending on the time required to obtain sufficient quantities from the original source, or to identify and obtain sufficient quantities from an alternative source. Continued availability of these components at acceptable prices, or at all, may be affected if those suppliers decided to concentrate on the production of common components instead of components customized to meet Garmin’s requirements.
 
Seasonality
 
                Our sales are subject to seasonal fluctuation.  Sales of our consumer products are generally higher in the fourth quarter, due to increased demand during the holiday buying season, and, to a lesser extent, the second quarter, due to increased demand during the spring and summer season and the Father’s Day/graduation buying season.  Sales of consumer products are also influenced by the timing of the release of new products.  Our aviation products do not experience much seasonal variation, but are more influenced by the timing of the release of new products when the initial demand is typically the strongest.
 
Backlog
 
                Our sales are generally of a consumer nature and there is a relatively short cycle between order and shipment.  Therefore, we believe that backlog information is not material to the understanding of our business.  We typically ship most orders within 72 hours of receipt.
 
Intellectual Property
 
Our success and ability to compete is dependent in part on our proprietary technology.  We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. In addition, Garmin often relies on licenses of intellectual property for use in its business.  For example, Garmin obtains licenses for digital cartography technology for use in our products from various sources. 
 
 As of February 1, 2014, Garmin’s worldwide IP portfolio includes over 820 patent and 470 trademark registrations issued worldwide.  For the past seven years Garmin has been selected as a constituent of the Ocean Tomo® 300 Patent Index which recognizes companies with high intellectual property value. We believe that our continued success depends on the intellectual skills of our employees and their ability to continue to innovate.  Garmin will continue to file and prosecute patent applications when appropriate to attempt to protect Garmin’s rights in its proprietary technologies. 
 
 
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There is no assurance that our current patents, or patents which we may later acquire, may successfully withstand any challenge, in whole or in part. It is also possible that any patent issued to us may not provide us with any competitive advantages, or that the patents of others will preclude us from manufacturing and marketing certain products. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or to obtain and use information that we regard as proprietary.  Litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others or to defend against claims of infringement or invalidity.
 
Regulations
 
The telecommunications industry is highly regulated, and the regulatory environment in which Garmin operates is subject to change.  In accordance with the United States’ Federal Communications Commission (FCC) rules and regulations, wireless transceiver products are required to be certified by the FCC and comparable authorities in foreign countries where they are sold.  Garmin’s products sold in Europe are required to comply with relevant directives of the European Commission.  A delay in receiving required certifications for new products, or enhancements to Garmin’s products, or losing certification for Garmin’s existing products could adversely affect our business.    In addition, aviation products that are intended for installation in “type certificated aircraft” are required to be certified by the FAA, its European counterpart, the European Aviation Safety Agency, and other comparable organizations before they can be used in an aircraft. 
 
Because Garmin Corporation, one of the Company’s principal subsidiaries, is located in Taiwan, foreign exchange control laws and regulations of Taiwan with respect to remittances into and out of Taiwan may have an impact on Garmin’s operations.  The Taiwan Foreign Exchange Control Statute, and regulations thereunder, provides that all foreign exchange transactions must be executed by banks designated to handle such business by the Ministry of Finance of Taiwan and by the Central Bank of the Republic of China (Taiwan), also referred to as the CBC.  Current regulations favor trade-related foreign exchange transactions. Consequently, foreign currency earned from exports of merchandise and services may now be retained and used freely by exporters, while all foreign currency needed for the import of merchandise and services may be purchased freely from the designated foreign exchange banks.  Aside from trade-related foreign exchange transactions, Taiwan companies and residents may, without foreign exchange approval, remit outside and into Taiwan foreign currencies of up to $50 million and $5 million respectively, or their equivalent, each calendar year.  Currency conversions within the limits are processed by the designated banks and do not have to be reviewed and approved by the CBC.  The above limits apply to remittances involving a conversion between New Taiwan Dollars and U.S. Dollars or other foreign currencies.  The CBC typically approves foreign exchange in excess of the limits if a party applies with the CBC for review and presents legitimate business reasons justifying the currency conversion.  A requirement is also imposed on all enterprises to register all medium and long-term foreign debt with the CBC.
 
Environmental Matters
 
Garmin’s operations are subject to various environmental laws, including laws addressing air and water pollution and management of hazardous substances and wastes.  Substantial noncompliance with applicable environmental laws could have a material adverse effect on our business.  Currently, we do not anticipate material capital expenditures for environmental control facilities.
                                
Environmental regulation of Garmin’s products is increasing.  Many of Garmin's products are subject to laws relating to the chemical and material composition of our products and their energy efficiency.  Garmin is also subject to laws requiring manufacturers to be financially responsible for collection, recovery and recycling of wastes from certain electronic products.  Compliance with current environmental laws does not have a material impact on our business, but the impact of future enactment of environmental laws cannot yet be fully determined and could be substantial.
 
Garmin has implemented multiple Environmental Management System (EMS) policies in accordance with the International Organization for Standardization (ISO) 14001 standard for Environmental Health and Safety Management.  Garmin’s EMS policies set forth practices, standards, and procedures to ensure compliance with applicable environmental laws and regulations at Garmin’s Kansas headquarters facility, Garmin’s European headquarters facility, and Garmin’s Taiwan manufacturing facility.
 
 
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Regulatory and “Green Procurement” demands from our customers are also increasing; particularly in the areas of restricted substance use and environmentally-friendly design and manufacture initiatives.  The overall impacts of these customer requirements cannot yet be established.  Garmin is committed to improving our products and processes to meet our customer needs.
 
Employees
 
                As of December 28, 2013, Garmin had 10,086 full and part-time employees worldwide, of whom 3,804 were in the United States, 75 were in Canada, 4,687 were in Taiwan, 1,117 were in Europe, and 403 were in other global locations.   Except for some of Garmin’s employees in Brazil and Sweden, none of Garmin’s employees are represented by a labor union and none of Garmin's North American or Taiwan employees are covered by a collective bargaining agreement.  Garmin considers its employee relations to be good.
 
Item 1A.  Risk Factors
 
The risks described below are not the only ones facing our company.  Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations.  If any of the following risks occur, our business, financial condition or operating results could be materially adversely affected.
 
Risks Related to the Company
 
The demand for personal navigation devices (PNDs) has been and continues to be reduced by replacement technologies becoming available on mobile devices and factory-installed systems in new autos.
 
                From 2005 to 2008, we experienced substantial growth in the automotive/mobile segment.  This has resulted in GPS/navigation technologies being incorporated into competing devices such as mobile handsets, tablets, and new automobiles through factory-installed systems.  Mobile handsets and tablets are frequently GPS-enabled and many companies are now offering navigation software for these mobile devices.  The acceptance of this technology by consumers has halted our growth in this segment and reduced margins.  Navigation systems are also becoming more prevalent as optional equipment on new automobiles.  Increased navigation penetration on mobile handsets and in new automobiles is expected to cause further declines in sales of our portable navigation devices and could further reduced margins.
 
Our financial results are dependent on the automotive/mobile segment, which represents approximately 50% of our revenues, is maturing and expected to further decline in 2014.
 
                We experienced substantial growth through 2008 in the automotive/mobile segment of our business as the products became mass-market consumer electronics in both Europe and North America.  This market has peaked as penetration rates increased and competing technologies emerged.  This has resulted in, and could continue to result in, lower revenues for this segment and lower earnings per share.

Economic conditions and uncertainty could adversely affect our revenue and margins.
 
Our revenue and margins depend significantly on general economic conditions and the demand for products in the markets in which we compete.  Economic weakness or constrained consumer and business spending has resulted in decreased revenue and in the future, could result in decreased revenue and problems with our ability to manage inventory levels and collect customer receivables. In addition, financial difficulties experienced by our retailer and OEM customers have resulted, and could result in the future, in significant bad debt write-offs and additions to reserves in our receivables and could have an adverse affect on our results of operations. 
 
 
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Gross margins for our products may fluctuate or erode.
 
Gross margins in some of our segments have declined in recent years and could further decline in the future due to competitive price reductions that are not fully offset by material cost reductions. In addition, our overall gross margin may fluctuate from period to period due to a number of factors, including product mix, competition and unit volumes.  In particular, the average selling prices of a specific product tend to decrease over that product’s life.  To offset such decreases, we intend to rely primarily on component cost reduction, obtaining yield improvements and corresponding cost reductions in the manufacturing of existing products and on introducing new products that incorporate advanced features and therefore can be sold at higher average selling prices.  However, there can be no assurance that we will be able to obtain any such yield improvements or cost reductions or introduce any such new products in the future.  To the extent that such cost reductions and new product introductions do not occur in a timely manner or our products do not achieve market acceptance, our business, financial condition and results of operations could be materially adversely affected.
 
Changes in our United States federal income tax classification or in applicable tax laws could result in adverse tax consequences to our shareholders.
 
We do not believe that we, or any of our United States or non-United States subsidiaries, are currently a ‘‘passive foreign investment company’’ for United States federal income tax purposes.  We do not expect to become a passive foreign investment company.  However, because the passive foreign investment company determination is made annually based on whether the company’s income or assets meet certain thresholds as determined under United States federal tax principles which are based on facts and circumstances that may be beyond our control, we cannot assure that we will not become a passive foreign investment company in the future.  If we are a passive foreign investment company in any year, then any of our shareholders that is a United States person could be liable to pay tax on their pro rata share of our income plus an interest charge upon some distributions by us or when that shareholder sells our common shares at a gain.  Further, if we are classified as a passive foreign investment company in any year in which a United States person is a shareholder, we generally will continue to be treated as a passive foreign investment company with respect to such shareholder in all succeeding years, regardless of whether we continue to satisfy the income or asset tests mentioned above.
 
We do not believe that we, or any of our United States or non-United States subsidiaries, are currently a Controlled Foreign Corporation (CFC) for United States federal income tax purposes.  We do not expect to become a CFC.  The CFC determination is made daily based on whether the United States shareholders own more than fifty percent of the voting power or value of the Company.  Only United States persons that own ten percent or more of the voting power of the Company’s shares qualify as United States shareholders.  If the Company were to be classified as a CFC for an uninterrupted thirty day period in any year, the Company’s shareholders that qualify as United States shareholders could be liable to pay US income tax at ordinary income tax rates on their pro-rata share of certain categories of the Company’s income for the period in which the Company is classified as a CFC. As the Company cannot control the ownership of the Company’s stock nor can the Company control which shareholders participate in the Company’s stock buyback program, ownership changes could result that create United States shareholders which increase the risk of Garmin being treated as a CFC.
 
Legislative proposals have been considered in the United States within the past few years that could increase the United States tax burden of corporations with international operations and could broaden the circumstances under which foreign corporations could be considered resident in the United States.  Legislative proposals are being considered in Switzerland that could make significant changes in the corporate tax regime and increase the taxes applicable to us in Switzerland.  Our tax position could be adversely impacted by changes in Swiss, United States or foreign tax laws, tax treaties or tax regulations or the interpretation or enforcement thereof by any tax authority. We cannot predict the outcome of any specific legislative proposals.
 
 
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If we are not successful in the continued development, introduction or timely manufacture of new products, demand for our products could decrease.
 
We expect that a significant portion of our future revenue will continue to be derived from sales of newly introduced products.  The market for our products is characterized by rapidly changing technology, evolving industry standards and changes in customer needs.  If we fail to introduce new products, or to modify or improve our existing products, in response to changes in technology, industry standards or customer needs, our products could rapidly become less competitive or obsolete.  We must continue to make significant investments in research and development in order to continue to develop new products, enhance existing products and achieve market acceptance for such products.  However, there can be no assurance that development stage products will be successfully completed or, if developed, will achieve significant customer acceptance.
 
If we are unable to successfully develop and introduce competitive new products, and enhance our existing products, our future results of operations would be adversely affected.  Our pursuit of necessary technology may require substantial time and expense.  We may need to license new technologies to respond to technological change.  These licenses may not be available to us on terms that we can accept or may materially change the gross profits that we are able to obtain on our products. We may not succeed in adapting our products to new technologies as they emerge.  Development and manufacturing schedules for technology products are difficult to predict, and there can be no assurance that we will achieve timely initial customer shipments of new products.  The timely availability of these products in volume and their acceptance by customers are important to our future success.  From time to time we have experienced delays in shipping certain of our new products and any future delays, whether due to product development delays, manufacturing delays, lack of market acceptance, delays in regulatory approval, or otherwise, could have a material adverse effect on our results of operations.
 
If we are unable to compete effectively with existing or new competitors, our resulting loss of competitive position could result in price reductions, fewer customer orders, reduced margins and loss of market share.
 
The markets for many of our products are highly competitive, and we expect competition to increase in the future. Some of our competitors have significantly greater financial, technical and marketing resources than we do.  These competitors may be able to respond more rapidly to new or emerging technologies or changes in customer requirements.  They may also be able to devote greater resources to the development, promotion and sale of their products.  Increased competition could result in price reductions, fewer customer orders, reduced margins and loss of market share.  Our failure to compete successfully against current or future competitors could seriously harm our business, financial condition and results of operations.
 
We rely on independent dealers and distributors to sell our products, and disruption to these channels would harm our business.
 
Because we sell a majority of our products to independent dealers and distributors, we are subject to many risks, including risks related to their inventory levels and support for our products.  In particular, our dealers and distributors maintain significant levels of our products in their inventories.  If dealers and distributors attempt to reduce their levels of inventory or if they do not maintain sufficient levels to meet customer demand, our sales could be negatively impacted.
 
Many of our dealers and distributors also sell products offered by our competitors.  If our competitors offer our dealers and distributors more favorable terms, those dealers and distributors may de-emphasize or decline to carry our products. In the future, we may not be able to retain or attract a sufficient number of qualified dealers and distributors.  If we are unable to maintain successful relationships with dealers and distributors or to expand our distribution channels, our business will suffer.
 
 
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Our quarterly operating results are subject to fluctuations and seasonality.
 
Our operating results are difficult to predict. Our future quarterly operating results may fluctuate significantly.  If such operating results decline, the price of our stock would likely decline.  As we have expanded our operations, our operating expenses, particularly our research and development costs, have increased as a percentage of our sales.  If revenues decrease and we continue to increase research and development costs, our operating results would be negatively affected.
 
Historically, our revenues have been weaker in the first quarter of each fiscal year as our devices are highly consumer-oriented, and consumer buying is traditionally lower in this quarter.  Sales of certain of our marine and automotive products tend to be higher in our second fiscal quarter due to increased consumer spending for such products during the recreational marine, fishing, and travel season.  Sales of many of our consumer products also have been higher in our fourth fiscal quarter due to increased consumer spending patterns on electronic devices during the holiday season.  In addition, we attempt to time our new product releases to coincide with relatively higher consumer spending in the second and fourth fiscal quarters, which contributes to these seasonal variations.
 
Our quarterly financial statements will reflect fluctuations in foreign currency translation.
               
The operation of Garmin’s subsidiaries in international markets results in exposure to movements in currency exchange rates.  We have experienced significant foreign currency gains and losses due to the strengthening and weakening of the U.S. dollar.  The potential of volatile foreign exchange rate fluctuations in the future could have a significant effect on our results of operations.
 
                The currencies that create a majority of the Company’s exchange rate exposure are the Taiwan Dollar, Euro, and British Pound Sterling.  Garmin Corporation, headquartered in Sijhih, Taiwan, uses the local currency as the functional currency.  The Company translates all assets and liabilities at year-end exchange rates and income and expense accounts at average rates during the year.  In order to minimize the effect of the currency exchange fluctuations on our net assets, we have elected to retain most of our Taiwan subsidiary’s cash and investments in marketable securities denominated in U.S. dollars.
 
                Nonetheless, U.S. GAAP requires the Company at the end of each accounting period to translate into Taiwan Dollars all such U.S. Dollar denominated assets held by our Taiwan subsidiary.  This translation is required because the Taiwan Dollar is the functional currency of the subsidiary.  This U.S. GAAP-mandated translation will cause us to recognize gain or loss on our financial statements as the Taiwan Dollar/U.S. Dollar exchange rate varies.  Such gain or loss will create variations in our earnings per share.  Because there is minimal cash impact caused by such exchange rate variations, management will continue to focus on the Company’s operating performance before the impact of the foreign currency translation.
 
If we do not correctly anticipate demand for our products, we may not be able to secure sufficient quantities or cost-effective production of our products or we could have costly excess production or inventories.
 
We have generally been able to increase production to meet this increasing demand.  However, the demand for our products depends on many factors and will be difficult to forecast.  We expect that it will become more difficult to forecast demand as we introduce and support multiple products, as competition in the market for our products intensifies and as the markets for some of our products mature to the mass market category.  Significant unanticipated fluctuations in demand could cause the following problems in our operations:
 
· If demand increases beyond what we forecast, we would have to rapidly increase production. We would depend on suppliers to provide additional volumes of components and those suppliers might not be able to increase production rapidly enough to meet unexpected demand.
 
 
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· Rapid increases in production levels to meet unanticipated demand could result in higher costs for manufacturing and supply of components and other expenses.  These higher costs could lower our profit margins.  Further, if production is increased rapidly, manufacturing quality could decline, which may also lower our margins and reduce customer satisfaction.
 
· If forecasted demand does not develop, we could have excess production resulting in higher inventories of finished products and components, which would use cash and could lead to write-offs of some or all of the excess inventories.  Lower than forecasted demand could also result in excess manufacturing capacity or reduced manufacturing efficiencies at our facilities, which could result in lower margins.
 
We have benefited in the past from Taiwan government tax incentives offered on certain high technology capital investments that may not always be available.
 
Our effective tax rate is lower than the U.S. federal statutory rate, in part because we have benefited from incentives offered in Taiwan related to our high technology investments in Taiwan.  The loss of these tax benefits has begun to have a negative impact on our effective tax rate and reduced benefits will continue into the future.
 
We may experience unique economic and political risks associated with companies that operate in Taiwan.
 
Relations between Taiwan and the People’s Republic of China, also referred to as the PRC, and other factors affecting the political or economic conditions of Taiwan in the future could materially adversely affect our business, financial condition and results of operations and the market price and the liquidity of our shares.  Our principal manufacturing facilities where we manufacture all of our products, except our panel-mounted aviation products, are located in Taiwan.
 
Taiwan has a unique international political status.  The PRC asserts sovereignty over all of China, including Taiwan, certain other islands and all of mainland China.  The PRC government does not recognize the legitimacy of the Taiwan government.  Although significant economic and cultural relations have been established during recent years between Taiwan and the PRC, the PRC government has indicated that it may use military force to gain control over Taiwan in certain circumstances, such as the declaration of independence by Taiwan.  Relations between Taiwan and the PRC have on occasion adversely affected the market value of Taiwanese companies and could negatively affect our operations in Taiwan in the future.
 
Our intellectual property rights are important to our operations, and we could suffer loss if they infringe upon other’s rights or are infringed upon by others.
 
We rely on a combination of patents, copyrights, trademarks and trade secrets, confidentiality provisions and licensing arrangements to establish and protect our proprietary rights.  To this end, we hold rights to a number of patents and registered trademarks and regularly file applications to attempt to protect our rights in new technology and trademarks.  However, there is no guarantee that our patent applications will become issued patents, or that our trademark applications will become registered trademarks.  Moreover, even if approved, our patents or trademarks may thereafter be successfully challenged by others or otherwise become invalidated for a variety of reasons.   Thus, any patents or trademarks we currently have or may later acquire may not provide us a significant competitive advantage.
 
Third parties may claim that we are infringing their intellectual property rights.  Such claims could have a material adverse effect on our business and financial condition.  From time to time we receive letters alleging infringement of patents, trademarks or other intellectual property rights.  Litigation concerning patents or other intellectual property is costly and time consuming.  We may seek licenses from such parties, but they could refuse to grant us a license or demand commercially unreasonable terms.  We might not have sufficient resources to pay for the licenses.  Such infringement claims could also cause us to incur substantial liabilities and to suspend or permanently cease the use of critical technologies or processes or the production or sale of major products.
 
 
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We may become subject to significant product liability costs.
 
If our aviation products malfunction or contain errors or defects, airplane collisions or crashes could occur resulting in property damage, personal injury or death.  Malfunctions or errors or defects in our marine navigational products could cause boats to run aground or cause other wreckage, personal injury or death.  If our automotive or marine products contain defects or errors in the mapping supplied by third-party map providers or if our users do not heed our warnings about the proper use of these products, collisions or accidents could occur resulting in property damage, personal injury or death.  If any of these events occurs, we could be subject to significant liability for personal injury and property damage and, under certain circumstances, could be subject to a judgment for punitive damages.  We maintain insurance against accident-related risks involving our products.  However, there can be no assurance that such insurance would be sufficient to cover the cost of damages to others or that such insurance will continue to be available at commercially reasonable rates.  In addition, insurance coverage generally will not cover awards of punitive damages and may not cover the cost of associated legal fees and defense costs, which could result in lower margins.  If we are unable to maintain sufficient insurance to cover product liability costs or if our insurance coverage does not cover the award, this could have a materially adverse impact on our business, financial condition and results of operations.
 
We depend on our suppliers, some of which are the sole source for specific components, and our production would be seriously harmed if these suppliers are not able to meet our demand and alternative sources are not available, or if the costs of components rise.
 
We are dependent on third party suppliers for various components used in our current products.  Some of the components that we procure from third party suppliers include semiconductors and electroluminescent panels, liquid crystal displays, memory chips, batteries and microprocessors.  The cost, quality and availability of components are essential to the successful production and sale of our products.  Some components we use are from sole source suppliers. Certain application-specific integrated circuits incorporating our proprietary designs are manufactured for us by sole source suppliers.  Alternative sources may not be currently available for these sole source components.
 
In the past we have experienced shortages of liquid crystal displays and other components.  In addition, if there are shortages in supply of components, the costs of such components may rise. If suppliers are unable to meet our demand for components on a timely basis and if we are unable to obtain an alternative source or if the price of the alternative source is prohibitive, or if the costs of components rise, our ability to maintain timely and cost-effective production of our products would be seriously harmed.
 
We depend on third party licensors for the digital map data contained in our automotive/mobile products, and our business and/or gross margins could be harmed if we become unable to continue licensing such mapping data or if the royalty costs for such data rise.
                                       
We license digital mapping data for use in our products from various sources.  There are only a limited number of suppliers of mapping data for each geographical region.  The two largest digital map suppliers are HERE (formerly known as NAVTEQ) and Tele Atlas N.V.  HERE is owned by Nokia Oyj and Tele Atlas N.V. is owned by TomTom N.V.  Nokia and TomTom are both competitors of Garmin.
 
 Although we do not foresee difficulty in continuing to license data at favorable pricing due to the long term license extension signed between Garmin and HERE in June 2010 (extending our HERE license agreement through 2017 with an option to extend through 2021), if we are unable to continue licensing such mapping data and are unable to obtain an alternative source, or if the nature of our relationships with HERE changes detrimentally, our ability to supply mapping data for use in our products would be seriously harmed.
 
 
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We may pursue strategic acquisitions, investments, strategic partnerships or other ventures, and our business could be materially harmed if we fail to successfully identify, complete and integrate such transactions.
 
We intend to evaluate acquisition opportunities and opportunities to make investments in complementary businesses, technologies, services or products, or to enter into strategic partnerships with parties who can provide access to those assets, additional product or services offerings, additional distribution or marketing synergies or additional industry expertise.  We may not be able to identify suitable acquisition, investment or strategic partnership candidates, or if we do identify suitable candidates in the future, we may not be able to complete those transactions on commercially favorable terms, or at all.
 
Any past or future acquisitions could also result in difficulties assimilating acquired employees (including cultural differences with foreign acquisitions), operations, and products and diversion of capital and management’s attention away from other business issues and opportunities.  Integration of acquired companies may result in problems related to integration of technology and inexperienced management teams. In addition, the key personnel of the acquired company may decide not to work for us.  We may not successfully integrate internal controls, compliance under the Sarbanes-Oxley Act of 2002 and other corporate governance matters, operations, personnel or products related to acquisitions we have made in previous years or may make in the future.  If we fail to successfully integrate such transactions, our business could be materially harmed.
 
We may have additional tax liabilities.  
 
We are subject to income taxes in Switzerland, the United States and numerous foreign jurisdictions. Significant judgment is required in determining our worldwide provision for income taxes. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determination is uncertain. We are regularly under audit by tax authorities. Although we believe our tax estimates are reasonable, the final determination of tax audits and any related litigation could be materially different from our historical income tax provisions and accruals. The results of an audit or litigation could have a material effect on our income tax provision, net income or cash flows in the period or periods for which that determination is made.
 
Failure to obtain required certifications of our products on a timely basis could harm our business.
 
We have certain products, especially in our aviation segment, that are subject to governmental and similar certifications before they can be sold.  For example, FAA certification is required for all of our aviation products that are intended for installation in type certificated aircraft.  To the extent required, certification is an expensive and time-consuming process that requires significant focus and resources.  An inability to obtain, or excessive delay in obtaining, such certifications could have an adverse effect on our ability to introduce new products and, for certain aviation OEM products, our customers’ ability to sell airplanes. Delays in our obtaining certification for our aviation products have resulted, and may in the future result, in our being required to pay compensation to our customers.  Therefore, such inabilities or delays could adversely affect our operating results.  In addition, we cannot assure you that our certified products will not be decertified.  Any such decertification could have an adverse effect on our operating results.
 
Our business may suffer if we are not able to hire and retain sufficient qualified personnel or if we lose our key personnel.
 
Our future success depends partly on the continued contribution of our key executive, engineering, sales, marketing, manufacturing and administrative personnel.  We currently do not have employment agreements with any of our key executive officers. Swiss law prohibits us from paying severance payments to our senior executive officers, which may impair our ability to recruit for these positions.  We do not have key man life insurance on any of our key executive officers and do not currently intend to obtain such insurance.  The loss of the services of any of our senior level management, or other key employees, could harm our business.  Recruiting and retaining the skilled personnel we require to maintain and grow our market position may be difficult.  For example, in some recent years there has been a nationwide shortage of qualified electrical engineers and software engineers who are necessary for us to design and develop new products, and therefore, it has sometimes been challenging to recruit such personnel.  If we fail to hire and retain qualified employees, we may not be able to maintain and expand our business.
 
 
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There is uncertainty as to our shareholders’ ability to enforce certain foreign civil liabilities in Switzerland and Taiwan.
 
We are a Swiss company and a substantial portion of our assets are located outside the United States, particularly in Taiwan.  As a result, it may be difficult to effect service of process within the United States upon us.  In addition, there is uncertainty as to whether the courts of Switzerland or Taiwan would recognize or enforce judgments of United States courts obtained against us predicated upon the civil liability provisions of the securities laws of the United States or any state thereof, or be competent to hear original actions brought in Switzerland or Taiwan against us predicated upon the securities laws of the United States or any state thereof.
 
A shut down of U.S. airspace or imposition of restrictions on general aviation would harm our business.
 
Following the September 11, 2001 terrorist attacks, the FAA ordered all aircraft operating in the U.S. to be grounded for several days.  In addition to this shut down of U.S. airspace, the general aviation industry was further impacted by the additional restrictions implemented by the FAA on those flights that fly utilizing Visual Flight Rules (VFR).  The FAA restricted VFR flight inside 30 enhanced Class B (a 20-25 mile radius around the 30 largest metropolitan areas in the USA) airspace areas.  The Aircraft Owners and Pilots Association (AOPA) estimated that these restrictions affected approximately 41,800 general aviation aircraft based at 282 airports inside the 30 enhanced Class B airspace areas.  The AOPA estimates that approximately 90% of all general aviation flights are conducted VFR, and that only 15% of general aviation pilots are current to fly utilizing Instrument Flight Rules (IFR).
 
The shutdown of U.S. airspace following September 11, 2001 caused reduced sales of our general aviation products and delays in the shipment of our products manufactured in our Taiwan manufacturing facility to our distribution facility in Olathe, Kansas, thereby adversely affecting our ability to supply new and existing products to our dealers and distributors.
 
Any future shut down of U.S. airspace or imposition of restrictions on general aviation could have a material adverse effect on our business and financial results.
 
A shut down of Federal Aviation Administration operations would harm our business.
 
Any failure of Congress to appropriate funds for FAA operations that results in any shut down of FAA operations or furloughing of FAA employees could result in delays in the required FAA certification of our avionics products and in the production, sale and registration of aircraft that use our avionics products.  Such delays could have a material adverse effect on our business and financial results.
 
Many of our products rely on the Global Positioning System.
 
The Global Positioning System (GPS) is a satellite-based navigation and positioning system consisting of a constellation of orbiting satellites.  The satellites and their ground control and monitoring stations are maintained and operated by the United States Department of Defense.  The Department of Defense does not currently charge users for access to the satellite signals.  These satellites and their ground support systems are complex electronic systems subject to electronic and mechanical failures and possible sabotage. The satellites were originally designed to have lives of 7.5 years and are subject to damage by the hostile space environment in which they operate.  However, of the current deployment of satellites in place, some have been operating for more than 12 years.
 
To repair damaged or malfunctioning satellites is currently not economically feasible. If a significant number of satellites were to become inoperable, there could be a substantial delay before they are replaced with new satellites. A reduction in the number of operating satellites may impair the current utility of the GPS system and the growth of current and additional market opportunities. GPS satellites and ground control segments are being modernized. GPS modernization software updates can cause problems. We depend on public access to open technical specifications in advance of GPS updates.
 
GPS is operated by the U. S. Government, which is committed to maintenance and improvement of GPS; however if the policy were to change, and GPS were no longer supported by the U. S. Government, or if user fees were imposed, it could have a material adverse effect on our business, results of operations, and financial condition.
 
 
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Some of our products also use signals from Satellite Based Augmentation Systems (SBAS) that augment GPS, such as the U.S. Wide Area Augmentation System (WAAS), Japanese MTSAT-based Satellite Augmentation System (MSAS), and European Geostationary Navigation Overlay Service (EGNOS).  Any curtailment of SBAS operating capability could result in decreased user capability for many of our aviation products, thereby impacting our markets.
 
Any of the foregoing factors could affect the willingness of buyers of our products to select Global Positioning System-based products instead of products based on competing technologies.
 
Any reallocation or repurposing of radio frequency spectrum could cause harmful interference with the reception of Global Positioning System signals. This interference could harm our business.
 
Our Global Positioning System technology is dependent on the use of the Standard Positioning Service (SPS) provided by the U.S. Government’s Global Positioning System satellites.  The Global Positioning System operates in radio frequency bands that are globally allocated for radio navigation satellite services.  International allocations of radio frequency are made by the International Telecommunications Union (ITU), a specialized technical agency of the United Nations. These allocations are further governed by radio regulations that have treaty status and which may be subject to modification every two to three years by the World Radio Communication Conference.  Each country also has regulatory authority on how each band is used.  In the United States, the Federal Communications Commission (FCC) and the National Telecommunications and Information Administration (NTIA) share responsibility for radio frequency allocations and spectrum usage regulations. 
 
Any ITU or national reallocation of radio frequency spectrum, including frequency band segmentation or sharing of spectrum, or other modifications of the permitted uses of relevant frequency bands, may materially and adversely affect the utility and reliability of our products and have significant negative impacts on our business and our customers. For example, the FCC has been considering a proposal by a private party, LightSquared, to repurpose spectrum adjacent to the GPS bands for terrestrial broadband wireless operations in metropolitan areas throughout the United States.  If the FCC were to permit implementation of LightSquared’s proposal, terrestrial broadband wireless operations could create harmful interference to GPS receivers within range of such operations. 
 
Our business is subject to disruptions and uncertainties caused by war or terrorism.
 
Acts of war or acts of terrorism, especially any directed at the GPS signals, could have a material adverse impact on our business, operating results, and financial condition. The threat of terrorism and war and heightened security and military response to this threat, or any future acts of terrorism, may cause a redeployment of the satellites used in GPS or interruptions of the system. To the extent that such interruptions have an effect on sales of our products, this could have a material adverse effect on our business, results of operations, and financial condition.
 
Privacy concerns relating to our technology could damage our reputation and deter current and potential users from using our products and applications.
 
Concerns about our practices with regard to the collection, use, disclosure, or security of personal information, user location information or other privacy related matters, even if unfounded, could damage our reputation and operating results. While we strive to comply with all applicable data protection laws and regulations, as well as our own posted privacy policies, any failure or perceived failure to comply may result in proceedings or actions against us by government entities or others, or could cause us to lose users and customers, which could potentially have an adverse effect on our business.
 
Regulatory authorities around the world are considering a number of legislative and regulatory proposals concerning data protection. In addition, the interpretation and application of consumer and data protection laws in the U.S., Europe and elsewhere are often uncertain and in flux. It is possible that these laws may be interpreted and applied in a manner that is inconsistent with our data practices. If so, in addition to the possibility of fines, this could result in an order requiring that we change our data practices, which could have an adverse effect on our business and results of operations. Complying with these various laws could cause us to incur substantial costs or require us to change our business practices in a manner adverse to our business.
 
 
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Security breaches and other disruptions, including as a result of cyber attacks, could compromise our information and expose us to liability, which would cause our business and reputation to suffer. 
 
In the ordinary course of our business, we collect and store sensitive data, including intellectual property, our proprietary business information and that of our customers and suppliers, and some personally identifiable information of our customers and employees, in our facilities and on our networks. The secure processing, maintenance and transmission of this information is important to our operations. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error or other disruptions. Any such breach could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, disrupt our operations, damage our reputation, and cause a loss of confidence, which could adversely affect our business.
 
We may be exposed to certain regulatory and financial risks related to climate change.
     
Climate change is receiving increasing attention worldwide.  Some scientists, legislators and others attribute global warming to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions.
 
Various regulatory and legislative measures to address greenhouse gas emissions are in different phases of implementation or discussion. In the aftermath of its 2009 “endangerment finding” that greenhouse gas emissions pose a threat to human health and welfare, the Environmental Protection Agency has begun to regulate greenhouse gas emissions under the authority granted to it under the Clean Air Act.  At the federal legislative level, Congressional passage of legislation adopting some form of federal mandatory greenhouse gas emission reduction, such as a nationwide cap-and-trade program, does not appear likely at this time, although it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency, which could increase the cost of doing business.
 
Because it is uncertain what laws and regulations will be enacted, we cannot predict the potential impact of such laws and regulations on our future consolidated financial condition, results of operations or cash flows.
 

Risks Relating to Our Shares

 
The volatility of our stock price could adversely affect investment in our common shares.
 
The market price of our common shares has been, and may continue to be, highly volatile.  During 2013, the closing price of our common shares ranged from a low of $32.60 to a high of $49.33. A variety of factors could cause the price of our common shares to fluctuate, perhaps substantially, including:
 
· announcements and rumors of developments related to our business, our competitors, our suppliers or the markets in which we compete;
· quarterly fluctuations in our actual or anticipated operating results;
· the availability, pricing and timeliness of delivery of components, such as flash memory and liquid crystal displays, used in our products;
· general conditions in the worldwide economy, including fluctuations in interest rates;
· changes in applicable tax laws and tax rates;
· announcements of technological innovations;
· new products or product enhancements by us or our competitors;
· product obsolescence and our ability to manage product transitions;
· developments in patents or other intellectual property rights and litigation;
 
 
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· developments in our relationships with our customers and suppliers;
· research reports or opinions issued by securities analysts or brokerage houses related to Garmin, our competitors, our suppliers or our customers; and
· any significant acts of terrorism against the United States, Taiwan or significant markets where we sell our products.
 
In addition, in recent years the stock market in general and the markets for shares of technology companies in particular, have experienced extreme price fluctuations which have often been unrelated to the operating performance of affected companies.  Any such fluctuations in the future could adversely affect the market price of our common shares.
 
Our officers and directors exert substantial influence over us.
 
As of January 13, 2014, current members and former members of our Board of Directors and our executive officers, together with members of their families and entities that may be deemed affiliates of or related to such persons or entities, beneficially owned approximately 40.30% of our outstanding common shares.  Accordingly, these shareholders may be able to determine the outcome of corporate actions requiring shareholder approval, such as mergers and acquisitions.  This level of ownership may have a significant effect in delaying, deferring or preventing a change in control of Garmin and may adversely affect the voting and other rights of other holders of our common shares.
 
The rights of our shareholders are governed by Swiss law.
 
                The rights of our shareholders are governed by Swiss law and Garmin Ltd.’s articles of association. The rights of shareholders under Swiss law differ from the rights of shareholders of companies incorporated in other jurisdictions. For example, Swiss law allows our shareholders acting at a shareholders’ meeting to authorize share capital that can be issued by the board of directors without approval of a shareholders’ meeting, but this authorization is limited to 50% of the existing registered share capital and must be renewed at a shareholders’ meeting at least every two years for it to continue to be available. Additionally, subject to specified exceptions, including the exceptions described in our articles of association, Swiss law grants preemptive rights to existing shareholders to subscribe for new issuances of shares and other securities. Swiss law also does not provide as much flexibility in the various terms that can attach to different classes of shares as the laws of some other jurisdictions. Swiss law also reserves for approval by shareholders certain corporate actions over which a board of directors would have authority in some other jurisdictions. For example, Swiss law provides that dividends and other distributions must be approved by shareholders at the general meeting of shareholders. These Swiss law requirements relating to our capital management may limit our flexibility, and situations may arise where greater flexibility would have provided substantial benefits to our shareholders.
 
We may not be able to make distributions or repurchase shares without subjecting you to Swiss withholding tax.
 
                If we are unable to make distributions, if any, through a reduction of par value or to pay dividends, if any, out of qualifying capital contribution reserves, then any dividends paid by us will generally be subject to a Swiss federal withholding tax at a rate of 35%. The withholding tax must be withheld from the gross distribution and paid to the Swiss Federal Tax Administration. A U.S. holder that qualifies for benefits under the Convention between the United States of America and the Swiss Confederation for the Avoidance of Double Taxation with Respect to Taxes on Income may apply for a refund of the tax withheld in excess of the 15% treaty rate (or in excess of the 5% reduced treaty rate for qualifying corporate shareholders with at least 10% participation in our voting stock, or for a full refund in case of qualified pension funds). Payment of a capital distribution in the form of a par value reduction or a dividend out of qualifying capital contribution reserves is not subject to Swiss withholding tax. However, there can be no assurance that our shareholders will approve a reduction in par value or a dividend out of qualifying capital contribution reserves, that we will be able to meet the other legal requirements for a reduction in par value, or that Swiss withholding rules will not be changed in the future or that a change in Swiss law will not adversely affect us or our shareholders, in particular as a result of distributions out of qualifying capital contribution reserves becoming subject to additional corporate law or other restrictions. There are currently legislative projects pending in Swiss Parliament and the Swiss federal administration that – depending on their final form – may limit the distribution of qualifying capital contribution reserves. In addition, over the long term, the amount of par value and qualifying capital contribution reserves available for us to use for par value reductions or dividends will be limited. If we are unable to make a distribution through a reduction in par value or to pay a dividend out of qualifying capital contribution reserves, we may not be able to make distributions without subjecting you to Swiss withholding taxes.
 
 
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Under current Swiss tax law, repurchases of shares for the purposes of capital reduction are treated as a partial liquidation subject to 35% Swiss withholding tax on the difference between the par value and the repurchase price. However, the portion of the repurchase price that is attributed to qualifying capital contribution reserves of the shares repurchased will not be subject to the Swiss withholding tax. No partial liquidation treatment applies and no withholding tax is triggered if the shares are not repurchased for cancellation but held by us as treasury shares. However, should we not resell such treasury shares within six years, the withholding tax becomes due at the end of the six year period.
 
We may follow a share repurchase process for future share repurchases, if any, similar to a "second trading line" on the SIX Swiss Exchange in which Swiss institutional investors buy shares on the open market and sell these shares to us and are generally able to receive a refund of the Swiss withholding tax. However, if we are unable to use this process successfully, we may not be able to repurchase shares for the purposes of capital reduction without subjecting you to Swiss withholding taxes if and to the extent that the repurchase of shares is made out of retained earnings or other taxable reserves. No withholding tax would be applicable if and to the extent that qualifying capital contribution reserves are attributable to the share repurchase.
 
Item 1B.  Unresolved Staff Comments
 
None.
 
Item 2.  Properties
 
The following are the principal properties owned or leased by the Company and its subsidiaries:
 
Garmin International, Inc. and Garmin USA, Inc. occupy a facility of approximately 1,120,000 square feet on 42 acres in Olathe, Kansas, where the majority of product design and development work is conducted, the majority of aviation panel-mount products are manufactured and products are warehoused, distributed, and supported for North, Central and South America.  Garmin’s subsidiary, Garmin Realty, LLC also owns an additional 46 acres of land on the Olathe site for future expansion.  In connection with the bond financings for the facility in Olathe and the previous expansion of that facility, the City of Olathe holds the legal title to the Olathe facility which is leased to Garmin’s subsidiaries by the City.  Upon the payment in full of the outstanding bonds, the City of Olathe is obligated to transfer title to Garmin’s subsidiaries for the aggregate sum of $200.  Garmin International, Inc. has purchased all the outstanding bonds and continues to hold the bonds until maturity in order to benefit from property tax abatement.
 
Garmin Corporation owns and occupies a 249,326 square foot facility in Sijhih, Taipei County, Taiwan, a 223,469 square foot facility in Jhongli, Tao-Yang County, Taiwan, and an approximately 580,000 square foot facility in LinKou, Tao-Yang County, Taiwan. In these three facilities, Garmin Corporation manufactures all of Garmin’s consumer and portable aviation products and warehouses, markets and supports products for the Pacific Rim countries.
 
 
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Garmin AT, Inc. leases approximately 18 acres of land in Salem, Oregon under a ground lease.  This ground lease expires in 2030, but Garmin AT has the option to extend the ground lease until 2050.  Garmin AT, Inc. owns and occupies an 115,000 square foot facility for office, development and manufacturing use and a 33,000 square foot aircraft hangar, flight test and certification facility on this land.  Garmin AT, Inc. also leases 43,870 square feet of office space in a separate Salem, OR building for Garmin’s newly-opened West Coast customer support call center.
 
Garmin International, Inc. leases 148,320 square feet of land at New Century Airport in Gardner, Kansas under a ground lease which expires in 2026.  Garmin International, Inc. owns and occupies a 47,254 square foot aircraft hangar, flight test and certification facility on this land which is used in development and certification of aviation products.   Garmin International, Inc. owns a leasehold interest in an additional 52,794 square foot aircraft hangar, flight test and certification facility at New Century Airport in Gardner which is also used in development and certification of aviation products.
 
Garmin Würzburg GmbH leases approximately 40,000 square feet in Würzburg, Germany for office and research and development activities.  Garmin Cluj S.R.L. leases approximately 11,355 square feet in Cluj, Romania for research and development activities.
 
Various Garmin subsidiaries lease an additional: (i) 48,625 square feet of office space in Olathe, Kansas for a call center operation; (ii) 35,170 square feet of office space in Chandler, Arizona for software development; and (iii) 15,000 square feet of office space in Tucson, Arizona, used as offices and for research and development. Garmin is currently in the construction phase of a 60,000 square foot facility in Chandler, Arizona that will replace the current leased office space in Chandler, Arizona. 
 
Garmin (Europe) Ltd. owns and occupies a 155,000 square foot building located in Totton, Southampton, England, used as offices and a distribution facility.
 
Item 3.  Legal Proceedings
 
Bandspeed, Inc. v. Acer, Inc., Acer American Corporation, Belkin International, Inc., Belkin,Inc., Casio Computer Co., Ltd., Xasio Hitachi Mobile CommunicationsCo. Ltd., Xasio America, Inc., Dell Inc., Garmin International, Inc., Garmin USA, Inc., GN Netcom A/S, GN U.S. Inc. a/k/a GN Netcom Inc., Hewlett-Packard Company, Hewlett-Packard Development Company, L.P., HTC Corporation, HTC America, Inc., Huawei Technologies Co. Ltd., Kyocera Corporation, Kyocera International, Inc., Kyocera Communications, Inc., Kyocera Wireless Corporation, Lenovo (United States), Inc., LG Electronics, Inc., LG Electronics U.S.A. Inc., LG Electronics Mobilecomm U.S.A. Inc., Motorola, Inc., Nokia Corporation, Nokia Inc., Pantech Wireless, Inc. Plantronics, inc., Research in Motion Ltd., Research in Motion Corporation, Samsung Telecommunications America, LLC, TomTom International B.V., TomTom, Inc., Toshiba Corporation, Toshiba America information Systems, Inc., and Toshiba America, Inc.
               
                On June 30, 2010, Bandspeed, Inc. filed suit in the United States District Court for the Eastern District of Texas against 38 companies, including Garmin International, Inc. and Garmin USA, Inc. alleging infringement of U.S. Patent No 7,027,418 (“the ‘418 patent”) and U.S. Patent No 7,670,614 (“the ‘614 patent”). On January 21, 2011, Bandspeed, Inc. filed an amended complaint adding additional claims against several of the codefendants, but not against Garmin. On February 22, 2011, Garmin filed its answer to the amended complaint with counterclaims asserting that the asserted claims of the ’418 and ’614 patents are invalid and not infringed. On August 15, 2011, the court granted Garmin’s motion to transfer venue and transferred the case to the Western District of Texas. On December 23, 2011, Bandspeed, Inc. filed a second amended complaint adding additional claims against Garmin. On January 24, 2012, Garmin filed a motion to dismiss these additional claims. On February 4, 2014, the parties finalized a settlement agreement resolving this matter.
 
 
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Cuozzo Speed Technologies, LLC, v Garmin International Inc,. Garmin USA, INC., and Chrysler Group LLC.
 
On June 19, 2012, Cuozzo Speed Technologies, LLC filed suit in the United States District Court for the District of New Jersey against Garmin International, Inc., Garmin USA, INC., (collectively “Garmin”) and Chrysler Group LLC, alleging infringement of U.S. Patent No. 6,778,074 (“the ‘074 patent”). On July 16, 2012, Garmin filed its answer asserting that each asserted claim of the patent-in-suit is invalid and/or not infringed. On September 17, 2012 Garmin filed with the U.S. Patent and Trademark Office (“PTO”) a petition for inter partes review of the ’074 patent as being anticipated and obvious in view of the prior art. On January 9, 2013, the PTO partially granted Garmin’s petition and instituted review of certain claims of the ‘074 patent. On August 16, 2013, a hearing in this inter partes review took place before the PTO’s Patent Trial and Review Board.  On June 20, 2013, Garmin filed a second petition for inter partes review of the ’074 patent. On November 13, 2013, the PTO’s Patent Trial and Review Board issued a Final Decision in the original inter partes review finding in Garmin’s favor.  On January 10, 2014, the parties finalized a settlement agreement resolving this matter.
 
Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. v. Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc.
 
On September 23, 2013 Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. filed suit in the United States District Court for the District of Oregon against Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 6,084,565 (“the ‘565 patent”), 6,424,292 (“the ‘292 patent”), 7,161,561 (“the ‘561 patent”), and 7,768,447 (“the ‘447 patent”). On October 22, 2013, Garmin filed its answer asserting that each asserted claim of the ‘565 patent, the ‘292 patent, the ’561 patent, and the ‘447 patent is invalid and/or not infringed.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
Harbinger Capital Partners LLC et al v. Deere & Company et al; LightSquared Inc. et al. v. Deere & Company et al.
 
                On August 9, 2013, Harbinger Capital Partners LLC and ten related entities filed a lawsuit (the “Harbinger Lawsuit”) in the United States District Court for the Southern District of New York against Deere & Company (“Deere”), Garmin International, Inc. (“Garmin”), Trimble Navigation Ltd. (“Trimble”), The U.S. GPS Industry Council (the “Council”), and the Coalition to Save Our GPS. Plaintiffs filed a first amended complaint on August 16, 2013, and a second amended complaint on January 21, 2014. The second amended complaint, which no longer names the Coalition to Save Our GPS as a defendant, seeks damages of at least $1.9 billion based on allegations of violation of Rule 10b5-1 of the Securities Exchange Act of 1934 (the “1934 Act”), violation of Section 20(a) of the 1934 Act, fraud, negligent misrepresentation, equitable estoppel, breach of contract, and violation of Section 349 of the New York General Business Law. Plaintiffs allege that they invested in a company now called LightSquared in the belief that LightSquared would be able to operate a new terrestrial, mobile telecommunications network (the “Terrestrial Plan”) on certain satellite radio frequencies. Plaintiffs also allege that LightSquared was not able to obtain approval from the Federal Communications Commission (FCC) to operate the proposed Terrestrial Plan because of interference it would cause to Global Positioning System (GPS) receivers operating in an adjacent frequency band. Plaintiffs further allege that defendants concealed the likelihood of such interference and breached an earlier alleged agreement with a predecessor of LightSquared regarding a different technical issue. Plaintiffs allege they were third-party beneficiaries of the agreement. The defendants have notified the court that they intend to file a motion to dismiss the complaint once the court sets a briefing schedule.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
 
30

 
On November 1, 2013, LightSquared, Inc. and two related entities (collectively, “LightSquared”) filed an adversary proceeding in the United States Bankruptcy Court for the Southern District of New York (where a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code filed by LightSquared and certain related entities is pending) against Deere, Garmin, Trimble, the Council, and the Coalition to Save Our GPS. LightSquared’s complaint seeks damages based on claims of promissory estoppel, breach of contract, breach of implied covenant of good faith, unjust enrichment, negligent misrepresentation, civil conspiracy, and tortious interference with contractual or business relationships. Like the allegations in the Harbinger Lawsuit, LightSquared alleges that it was not able to obtain approval from the FCC to operate its proposed Terrestrial Plan because of interference it would cause to GPS receivers. LightSquared also alleges that the inability to obtain FCC approval caused LightSquared damages, including the loss of third-party contracts.  LightSquared further alleges that defendants concealed the likelihood of such interference and/or represented to LightSquared that any interference issues had been resolved and that defendants breached earlier alleged agreements with LightSquared regarding a different technical issue. On November 15, 2013, Garmin, Deere, Trimble, and the Council filed a motion to withdraw the reference of the LightSquared adversary proceeding from the Bankruptcy Court to the United States District Court for the Southern District of New York the “District Court”).  On January 31, 2014 the District Court granted the defendants’ motion, withdrawing the reference of the LightSquared adversary proceeding to the District Court, which will hear the case going forward.  Garmin, Deere, Trimble, and the Council intend to file a motion to dismiss LightSquared’s complaint once the court sets a briefing schedule.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
ICON Health & Fitness, Inc. v. Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc.
 
On November 18, 2011, ICON Health & Fitness, Inc. filed suit in the United States District Court for the District of Utah against Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 7,789,800 (the ‘800 patent”) and 6,701,271 (“the ‘271 patent”).  On June 8, 2012, ICON filed an amended complaint alleging infringement of U.S. Patent Nos. 6,626,799 and 6,921,351.  On June 25, 2012, Garmin filed its answer asserting that each asserted claim of these additional patents-in-suit is invalid and/or not infringed.  On April 11, 2013, the Court dismissed ICON’s allegations of infringement of the ‘800 and ‘271 patents against Garmin without prejudice pursuant to a motion filed by ICON.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
ICON Health & Fitness, Inc. v. Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc.
 
On July 17, 2013 ICON Health & Fitness, Inc. filed suit in the United States District Court for the Central District of California against Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent No. 5,720,200 (the ‘200 patent”).  On February 7, 2014, the parties finalized a settlement agreement resolving this matter.
 
In the Matter of Certain Navigation Products, Including GPS Devices, Navigation and Display Systems, Radar Systems, Navigational Aids, Mapping Systems and Related Software
 
On September 23, 2013, Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. filed a complaint with the United States International Trade Commission against several companies, including Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin and the other respondents of U.S. Patent Nos. 6,084,565 (“the ‘565 patent”), 6,424,292 (“the ‘292 patent”), 7,161,561 (“the ‘561 patent”), and 7,768,447 (“the ‘447 patent”). On December 3, 2013, Garmin filed its response asserting that each asserted claim of the ‘565 patent, the ‘292 patent, the ‘561 patent, and the ‘447 patent is invalid and/or not infringed.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
 
31

 
In the Matter of Certain Wireless Consumer Electronics Devices and Components Thereof
 
On July 24, 2012, Technology Properties Limited LLC, Phoenix Digital Solutions LLC, and Patriot Scientific Corporation filed a complaint with the United States International Trade Commission against 24 companies, including Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin and the other respondents of U.S. Patent No. 5,809,336 (“the ‘336 patent”). On August 21, 2012 the ITC instituted an investigation under Section 337 of the Tariff Act pursuant to this complaint. On September 6, 2013, the ITC administrative law judge issued an Initial Determination finding that there was no violation of Section 337 by any Garmin company.  The parties await the issuance of a Final Determination by the ITC. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
Andrea Katz, on behalf of herself and all others similarly situated, v. Garmin Ltd. and Garmin International, Inc.
 
On December 18, 2013, a purported class action lawsuit was filed against Garmin International, Inc. and Garmin Ltd. in the U.S. District Court for the Northern District of Illinois.  The lead plaintiff was Andrea Katz, on behalf of herself and all others similarly situated.  The class of plaintiffs that Andrea Katz purported to represent includes all individuals who purchased any model of Forerunner watch in the State of Illinois and the United States. Plaintiff asserted claims for breach of contract, breach of express warranty, breach of implied warranties, negligence, negligent misrepresentation, and violations of Illinois statutory law. Plaintiff alleged that Forerunner watch bands have an unacceptable rate of failure in that they detach from the watch. Plaintiff sought compensatory and punitive damages, prejudgment interest, costs, and attorneys’ fees, and injunctive relief.  On January 29, 2014 the court dismissed the lawsuit without prejudice.  On January 30, 2014, the plaintiff re-filed the lawsuit as a new action before the same court with the same claims for relief as the earlier action and adding an additional claim for unjust enrichment.  Garmin believes that plaintiff Andrea Katz’s claims were mooted prior to her re-filing her lawsuit.  On February 4, 2014, the court ordered the case to be transferred to the United States District Court for the District of Utah.  Garmin sought reconsideration of that order.  On February 13, 2014, the court ordered the parties to brief a dispositive motion concerning whether Andrea Katz had legal standing at the time she filed her second action.  The transfer to Utah has been stayed by the court pending ruling on these two motions.  No class has been certified at this time. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action. 
 
Brian Meyers, on behalf of himself and all others similarly situated, v. Garmin International, Inc. Garmin USA, Inc. and Garmin Ltd.
 
On August 13, 2013, Brian Meyers filed a putative class action complaint against Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd. in the United States District Court for the District of Kansas. Meyers alleges that lithium-ion batteries in certain Garmin products are defective and alleges violations of the Kansas Consumer Protection Act, breach of an implied warranty of merchantability, breach of contract, unjust enrichment, breach of express warranty and also requests declaratory relief that the batteries are defective and must be covered by Garmin’s warranties. The complaint seeks an order for class certification, a declaration that the batteries are defective, an order of injunctive relief, payment of damages in an unspecified amount on behalf of a putative class of all purchasers of certain Garmin products, and an award of attorneys’ fees. On September 18, 2013 the plaintiff voluntarily dismissed Garmin Ltd. as a defendant without prejudice. On October 18, 2013 the plaintiff filed an amended class action complaint. On November 1, 2013 the remaining Garmin defendants filed a motion to dismiss all counts of the complaint for failure to state a claim on which relief can be granted. On January 24, 2014, the Court granted the motion to dismiss in part and denied it in part, dismissing the count for declaratory relief and the prayer for a declaration that the batteries are defective, but allowing the case to proceed on other substantive counts. No class has been certified at this time.  On February 7, 2014 Garmin International, Inc. and Garmin USA, Inc. filed an answer contesting all the remaining counts in the complaint.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action. 
 
 
32

 
MSPBO, LLC v. Garmin International, Inc.
 
On December 16, 2013, MSPBO, LLC filed suit in the United States District Court for the District of Colorado against Garmin International, Inc. alleging infringement of U.S. Patent No. 6,744,375.  On January 9, 2014, Garmin filed a motion to dismiss the complaint alleging that the claims are subject to arbitration pending in Kansas and alternatively asked the District of Colorado to stay the suit until the arbitration in Kansas is resolved.  Garmin previously filed a petition on January 8, 2014 with the District Court of Johnson County, Kansas to compel arbitration with Phatrat Technology, Inc. and Phatrat Technology, LLC, alleging that the license previously granted to Garmin or its affiliate, Dynastream Innovations, Inc., by Phatrat covers MSPBO’s current claims as MSPBO is an affiliate of Phatrat under the license agreement with Garmin and/or Dynastream.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
Pacing Technologies, LLC v. Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd.
 
On May 1, 2012, Pacing Technologies, LLC filed suit in the United States District Court for the Southern District of California against Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd alleging infringement of U.S. Patent No. 8,101,843.  Garmin Ltd was dismissed as a defendant on October 9, 2012.  On July 6, 2012, Garmin filed its answer asserting that each asserted claim of the patent-in-suit is invalid and/or not infringed. The court held a hearing on claim construction on June 27, 2013.  On October 15, 2013 the court issued a claim construction order.  On December 9, 2013, Garmin International, Inc. and Garmin USA, Inc. filed motions for summary judgment of non-infringement and invalidity.  On February 11, 2014, the court held a hearing on Garmin’s summary judgment motions. The parties await the court’s ruling on these motions.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
Silver State Intellectual Technologies, Inc. v. Garmin International, Inc. and Garmin USA, Inc.
 
                On September 29, 2011, Silver State Intellectual Technologies, Inc. filed suit in the United States District Court for the District of Nevada against Garmin International, Inc. and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 6,525,768; 6,529,824; 6,542,812; 7,343,165; 7,522,992; 7,593,812; 7,650,234; 7,702,455 and 7,739,039. On December 8, 2011, Garmin filed its answer asserting that each asserted claim of the patents-in-suit is invalid and/or not infringed. On April 5, 2013, the Court held a claim construction hearing and on August 15, 2013 the Court issued an order construing the clams of the patents in suit.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
Technology Properties Limited, LLC et al v. Garmin Ltd., Garmin International, Inc. and Garmin USA, Inc.
 
                On July 24, 2012 Technology Properties Limited LLC, Phoenix Digital Solutions LLC, and Patriot Scientific Corporation filed suit in the U.S. District Court for the Northern District of California against Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging infringement by Garmin of one or more of the following patents: U.S. Patent No. 5,809,336, U.S. Patent 5,440,749 and U.S. Patent No. 5,530,890. By agreement of the parties, on October 29, 2012 this lawsuit was stayed pending the resolution of the investigation by the International Trade Commission in In the Matter of Certain Wireless Consumer Electronics Devices and Components Thereof which is described above. On March 21, 2012, Technology Properties Limited LLC filed a petition for reorganization under Chapter 11 of the federal bankruptcy laws.   Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this action are without merit and intends to vigorously defend this action.
 
 
33

 
Visteon Global Technologies, Inc. and Visteon Technologies LLC v. Garmin International, Inc.
 
On February 10, 2010, Visteon Global Technologies, Inc. and Visteon Technologies LLC filed suit in the United States District Court for the Eastern District of Michigan, Southern Division, against Garmin International, Inc. alleging infringement of U.S. Patent No. 5,544,060 (“the ‘060 patent”), U.S. Patent No. 5,654,892 (“the ‘892 patent”), U.S. Patent No. 5,832,408 (“the ‘408 patent”), U.S. Patent No 5,987,375 (“the ‘375 patent”) and U.S. Patent No 6,097,316 (“the ‘316 patent”). On May 17, 2010, Garmin filed its answer asserting that each claim of the ‘060 patent, the ‘892 patent, the ‘408 patent and the ‘375 patent is invalid and/or not infringed. On April 12, 2011, the special master appointed by the court held a claim construction hearing. On December 12, 2011, the court issued an order adopting the special master’s report construing the claims of the patents-in-suit. On September 14, 2012, Garmin filed with the U.S. Patent and Trademark Office petitions for ex parte reexamination of the ‘408 patent and the ‘060 patent as being anticipated and obvious in view of the prior art. The U.S. Patent and Trademark Office subsequently granted Garmin’s requests for ex parte reexaminations and initially rejected all identified claims.  On April 15, 2013, the U.S. Patent and Trademark Office issued a reexamination certificate confirming the patentability of the challenged claims of the ‘060 patent.  On November 30, 2012, Garmin filed motions for summary judgment of non-infringement and /or invalidity for the ‘892, ‘316, and ‘375 patents.  Visteon filed its own motions for summary judgment of infringement of the ‘408 patent and validity, under section 112, of the ‘375 and ‘060 patents.  On February 4, 2013, the summary judgment motions were referred to the special master for consideration.  Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.
 
                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.
 
Item 4.  Mine Safety Disclosure
 
None.
 
Executive Officers of the Registrant
 
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to paragraph (b) of Item 401 of Regulation S-K, the following list is included as an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being included in the Company’s Definitive Proxy Statement in connection with its annual meeting of shareholders scheduled for June 6, 2014.
 
Dr. Min H. Kao, age 65, has served as Executive Chairman of Garmin Ltd. since January 2013 and was previously Chairman of Garmin Ltd. from August 2004 to December 2012 and Co-Chairman of Garmin Ltd. from August 2000 to August 2004.  He served as Chief Executive Officer of Garmin Ltd. from August 2002 to December 2012 and previously served as Co-Chief Executive Officer from August 2000 to August 2002.  Dr. Kao served as a director and officer of various subsidiaries of the Company from August 1990 until January 2013.  Dr. Kao holds Ph.D. and MS degrees in Electrical Engineering from the University of Tennessee and a BS degree in Electrical Engineering from National Taiwan University.
 
Clifton A. Pemble, age 48, has served as a director of Garmin Ltd. since August 2004.  He has served as President and Chief Executive Officer of Garmin Ltd. since January 2013.  Previously, he served as President and Chief Operating Officer of Garmin Ltd. from October 2007 to December 2012. Previously, he was Vice President, Engineering of Garmin International, Inc. from 2005 to October 2007, Director of Engineering of Garmin International, Inc. from 2003 to 2005, and Software Engineering Manager of Garmin International, Inc. from 1995 to 2002 and a Software Engineer with Garmin International, Inc. from 1989 to 1995. Mr. Pemble has served as a director and officer of various Garmin subsidiaries since August 2003. Mr. Pemble holds BA degrees in Mathematics and Computer Science from MidAmerica Nazarene University.
 
 
34

 
Kevin S. Rauckman, age 51, has served as Chief Financial Officer and Treasurer of Garmin Ltd. since August 2000.  He previously served as Director of Finance and Treasurer of Garmin International, Inc. since January 1999 and has served as a director and officer of various subsidiaries of the Company since April 2001. Mr. Rauckman holds BS and MBA degrees in Business from the University of Kansas.
 
Andrew R. Etkind, age 58, has served as Vice President, General Counsel and Secretary of Garmin Ltd. since June 2009. He was previously General Counsel and Secretary of Garmin Ltd. from August 2000 to June 2009.  He has been Vice President and General Counsel of Garmin International, Inc. since July 2007, General Counsel since February 1998, and Secretary since October 1998. Mr. Etkind has served as a director and officer of various Garmin subsidiaries since December 2001.  Mr. Etkind holds BA, MA and LLM degrees from Cambridge University, England and a JD degree from the University of Michigan Law School.
 
                All executive officers are elected by and serve at the discretion of the Company’s Board of Directors.  None of the executive officers have an employment agreement with the Company.  There are no arrangements or understandings between the executive officers and any other person pursuant to which he or she was or is to be selected as an officer. There is no family relationship among any of the executive officers.  Dr. Min H. Kao is the brother of Ruey-Jeng Kao, who is a supervisor of Garmin Corporation, Garmin’s Taiwan subsidiary, who serves as an ex-officio member of Garmin Corporation’s Board of Directors.
 
PART II
 
Item 5.  Market for the Company’s Common Shares, Related Shareholder Matters and Issuer Purchases of Equity Securities
 
                Garmin’s common shares have traded on the Nasdaq Stock Market LLC under the symbol “GRMN” since its initial public offering on December 8, 2000 (the “IPO”).  As of January 24, 2014, there were 216 shareholders of record.
 
                The high and low sales prices of Garmin’s common shares as reported on the Nasdaq Stock Market for each fiscal quarter of fiscal years 2013 and 2012 was as follows:
               
 
 
Year Ended
 
 
 
December 28, 2013
 
December 29, 2012
 
 
 
High
 
Low
 
High
 
Low
 
First Quarter
 
$
42.25
 
$
32.97
 
$
48.86
 
$
39.36
 
Second Quarter
 
$
36.88
 
$
32.60
 
$
49.33
 
$
36.76
 
Third Quarter
 
$
45.42
 
$
34.96
 
$
42.45
 
$
35.84
 
Fourth Quarter
 
$
49.33
 
$
45.70
 
$
42.73
 
$
36.12
 
 
                On June 7, 2013 the shareholders approved a cash dividend in the amount of $1.80 per share out of Garmin’s general reserves from capital contribution payable in four equal installments.  The board anticipated the scheduling of the dividend as follows: $0.45 on June 28, 2013 to shareholders of record on June 18, 2013, $0.45 on September 30, 2013 to shareholders of record on September 16, 2013, $0.45 on December 31, 2013 to shareholders of record on December 16, 2013 and $0.45 on March 31, 2014 to shareholders of record on March 17, 2014.  The Company paid the 2013 dividends in accordance with the schedule above and expects to pay the March 31, 2014 dividend.  In addition, Garmin currently expects to pay a quarterly cash dividend in the remaining three quarters of 2014. The decision of whether to pay a dividend and the amount of the dividend will be voted on by the Company’s shareholders as required by Swiss law. 
 
The Board of Directors approved a share repurchase program on February 12, 2010, authorizing the Company to repurchase up to $300 million of the Company’s shares as market and business conditions warrant.   This share repurchase authorization expired on December 29, 2012.
 
 
35

 
The Board of Directors approved a share repurchase program on February 15, 2013, authorizing the Company to repurchase up to $300 million of the Company’s shares as market and business conditions warrant. The share repurchase authorization expires on December 31, 2014.
 
 
 
 
 
 
 
 
Maximum Number of  Shares (or
 
 
 
 
 
 
 
 
Approx. Dollar Value of Shares
 
 
 
Total # of
 
Average Price
 
in Thousands) That May Yet Be
 
Period
 
Shares Purchased
 
Paid Per Share
 
Purchased Under the Plan
 
Sept 29 - Oct 26, 2013
 
-
 
 
-
 
$
273,074
 
Oct 27 - Nov 23, 2013
 
241,403
 
$
46.92
 
$
261,747
 
Nov 24 - Dec 28, 2013
 
422,005
 
$
48.08
 
$
241,460
 
Total
 
663,408
 
$
47.65
 
$
241,460
 
 
                We refer you to Item 12 of this report under the caption “Equity Compensation Plan Information” for certain equity plan information required to be disclosed by Item 201(d) of Regulation S-K.
 
Item 6.  Selected Financial Data
 
                The following table sets forth selected consolidated financial data of the Company.  The selected consolidated balance sheet data as of December 28, 2013 and December 29, 2012 and the selected consolidated statement of income data for the years ended December 28, 2013, December 29, 2012, and December 31, 2011 were derived from the Company’s audited consolidated financial statements and the related notes thereto which are included in Item 8 of this annual report on Form 10-K.  The selected consolidated balance sheet data as of  December 31, 2011, December 25, 2010, and December 26, 2009 and the selected consolidated statement of income data for the years ended December 25, 2010 and December 26, 2009 were derived from the Company’s audited consolidated financial statements, not included herein.
 
                The information set forth below is not necessarily indicative of the results of future operations and should be read together with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes to those statements included in Items 7 and 8 in Part II of this Form 10-K. 
 
 
36

 
 
 
Years ended (1)
 
 
 
Dec. 28, 2013
 
Dec. 29, 2012
 
Dec. 31, 2011 (2)
 
Dec. 25, 2010
 
Dec. 26, 2009
 
 
 
(in thousands, except per share data)
 
Consolidated Statements of Income Data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
2,631,851
 
$
2,715,675
 
$
2,758,569
 
$
2,689,911
 
$
2,946,440
 
Cost of goods sold
 
 
1,224,551
 
 
1,277,195
 
 
1,419,977
 
 
1,343,537
 
 
1,502,329
 
Gross profit
 
 
1,407,300
 
 
1,438,480
 
 
1,338,592
 
 
1,346,374
 
 
1,444,111
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising expense
 
 
112,905
 
 
138,757
 
 
145,024
 
 
144,613
 
 
155,521
 
Selling, general and administrative
 
 
355,440
 
 
369,790
 
 
341,217
 
 
287,824
 
 
264,202
 
Research and development
 
 
364,923
 
 
325,773
 
 
298,584
 
 
277,261
 
 
238,378
 
Total operating expenses
 
 
833,268
 
 
834,320
 
 
784,825
 
 
709,698
 
 
658,101
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income
 
 
574,032
 
 
604,160
 
 
553,767
 
 
636,676
 
 
786,010
 
Other income/(expense), net (3), (4)
 
 
79,526
 
 
20,368
 
 
30,394
 
 
(59,404)
 
 
22,641
 
Income before income taxes
 
 
653,558
 
 
624,528
 
 
584,161
 
 
577,272
 
 
808,651
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income tax provision/(benefit) (5)
 
 
41,146
 
 
82,125
 
 
63,265
 
 
(7,331)
 
 
104,701
 
Net income
 
$
612,412
 
$
542,403
 
$
520,896
 
$
584,603
 
$
703,950
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
$
3.13
 
$
2.78
 
$
2.68
 
$
2.97
 
$
3.51
 
Diluted
 
$
3.12
 
$
2.76
 
$
2.67
 
$
2.95
 
$
3.50
 
Weighted average common shares
    outstanding:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
195,411
 
 
194,909
 
 
194,105
 
 
196,979
 
 
200,395
 
Diluted
 
 
196,341
 
 
196,213
 
 
194,894
 
 
198,009
 
 
201,161
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash dividends paid per share
 
$
1.80
 
$
1.80
 
$
1.60
 
$
1.50
 
$
0.75
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Data (at end of Period):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,179,149
 
$
1,231,180
 
$
1,287,160
 
$
1,260,936
 
$
1,091,581
 
Marketable securities
 
 
1,651,968
 
 
1,641,395
 
 
1,208,155
 
 
801,819
 
 
766,047
 
Total assets
 
 
4,869,699
 
 
4,819,124
 
 
4,471,338
 
 
3,988,688
 
 
3,828,082
 
Total debt
 
 
-
 
 
-
 
 
-
 
 
-
 
 
-
 
Total stockholders' equity
 
 
3,659,706
 
 
3,531,796
 
 
3,256,581
 
 
3,049,562
 
 
2,836,447
 
 
(1)
Our fiscal year-end is the last Saturday of the calendar year and does not always fall on December 31.  All years presented contain 52 weeks excluding Fiscal 2011 which includes 53 weeks.
(2)
Includes a change in estimate for per unit revenue and cost deferrals.  The increase to net sales, gross profit, net income, basic net income per share and diluted net income per share was $77.8 million, $66.5 million, $59.3 million, $0.31, and $0.30, respectively.
(3)
Other income/(expense), net mainly consists of gain and/or loss on sale of equity securities, interest income, interest expense, and foreign currency gain (loss)
(4)
Includes $35.5 million foreign currency gain in 2013 and $20.0 million, $12.1 million, $88.4 million, and $6.0 million foreign currency losses in 2012, 2011, 2010, and 2009 respectively.
(5)
Includes a $68.7 million material income tax reserve release of uncertain tax position reserves from 2009 partially offset by Taiwan surtax expense due to the release of reserves, recorded in 2013, and a $98.7 million material income tax reserve release of uncertain tax position reserves from 2006 to 2008, partially offset by a settlement for the 2007 tax year in the US and Taiwan surtax expense due to the release of reserves, recorded in 2010.
 
  
37

 
Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following discussion and analysis of our financial condition and results of operations focuses on and is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included in this Form 10-K.  This discussion should be read in conjunction with, and is qualified by reference to, the other related information including, but not limited to, the audited consolidated financial statements (including the notes thereto), the description of our business, all as set forth in this Form 10-K, as well as the risk factors discussed above in Item 1A.
 
As previously noted, the discussion set forth below, as well as other portions of this Form 10-K, contain statements concerning potential future events.  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 on which the statements are based 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 discussed above in Item 1A.  Readers are strongly encouraged to consider those factors when evaluating any such forward-looking statement.  We do not undertake to update any forward-looking statements in this Form 10-K.
 
Garmin’s fiscal year is a 52-53 week period ending on the last Saturday of the calendar year.  Fiscal year 2013 and 2012 contained 52 weeks compared to 53 weeks for 2011.  Unless otherwise stated, all years and dates refer to the Company’s fiscal year and fiscal periods.  Unless the context otherwise requires, references in this document to "we," "us," "our" and similar terms refer to Garmin Ltd. and its subsidiaries.
 
Unless otherwise indicated, dollar amounts set forth in the tables are in thousands, except per share data.
 

Overview

 
We are 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, which serve the marine, outdoor, fitness, automotive/mobile, and aviation markets.  Our segments offer products through our network of subsidiary distributors and independent dealers and distributors.  However, the nature of products and types of customers for the five segments can vary significantly.  As such, the segments are managed separately. 
 
Since our first products were delivered in 1991, we have generated positive income from operations each year and have funded our growth from these profits. 
 
We experience some foreign currency fluctuations in our operating results.  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.  The Euro is the functional currency of most European subsidiaries. As these entities have grown, currency moves can generate material gains and losses.   Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses.  Other legal entities primarily use the local currency as the functional currency.  Due to the relative size of entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations within these entities are not expected to have a material impact on the Company’s financial statements.
 
Approximately 77% of sales by our European subsidiaries are now denominated in British Pounds Sterling or the Euro.  We experienced $35.5 million in foreign currency gains during fiscal year 2013 and ($20.0) million and ($12.1) million in foreign currency losses during fiscal years 2012 and 2011, respectively.  To date, we have not entered into hedging transactions related to any currency, and we do not currently plan to utilize hedging transactions in the future.
 
 
38

 

Critical Accounting Policies and Estimates

 

General

 
Garmin’s discussion and analysis of its financial condition and results of operations are based upon Garmin’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States.  The presentation of these financial statements requires Garmin to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an on-going basis, Garmin evaluates its estimates, including those related to customer sales programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, and contingencies and litigation.  Garmin bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.
 

Revenue Recognition

 
Garmin recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable, and collection is probable.  For the large majority of Garmin’s sales, these criteria are met once product has shipped and title and risk of loss have transferred to the customer.  The Company recognizes revenue from the sale of hardware products and software bundled with hardware that is essential to the functionality of the hardware in accordance with general revenue recognition accounting guidance. The Company recognizes revenue in accordance with industry specific software accounting guidance for standalone sales of software products and sales of software bundled with hardware not essential to the functionality of the hardware.  The Company generally does not offer specified or unspecified upgrade rights to its customers in connection with software sales.
 
Garmin introduced nüMaps Lifetime™ in January 2009, which is a single fee program that, subject to the program’s terms and conditions, enables customers to download the latest map and point of interest information every quarter for the useful life of their PND.  The revenue and associated cost of royalties for sales of nüMaps Lifetime™ products are deferred at the time of sale and recognized ratably on a straight-line basis over the estimated 36-month life of the products.  With the acquisition of Navigon AG in 2011, products marketed under the Navigon brand have a FreshMaps program that enables customers to download the latest map and point of interest information for two years.  The revenue and associated cost of royalties for sales of FreshMaps products are deferred at the time of sale and recognized ratably on a straight-line basis over the two year period. 
 
For multiple-element arrangements that include tangible products that contain software essential to the tangible product’s functionality and undelivered software elements that relate to the tangible product’s essential software, the Company allocates revenue to all deliverables based on their relative selling prices. In such circumstances, the accounting principles establish a hierarchy to determine the selling price to be used for allocating revenue to deliverables as follows: (i) vendor-specific objective evidence of fair value (VSOE), (ii) third-party evidence of selling price (TPE), and (iii) best estimate of the selling price (ESP).  VSOE generally exists only when the Company sells the deliverable separately, on more than a limited basis, at prices within a relatively narrow range.  In addition to the products listed below, the Company has offered certain other products including mobile applications, aviation subscriptions and extended warranties that involve multiple-element arrangements that are immaterial.
 
 
39

 
In 2010, Garmin began offering PNDs with lifetime map updates (LMUs) bundled in the original purchase price.  Similar to nüMaps Lifetime™, LMUs enable customers to download the latest map and point of interest information every quarter for the useful life of their PND.  In addition, Garmin offers PNDs with premium traffic service bundled in the original purchase price in the European market.  The Company has identified multiple deliverables contained in arrangements involving the sale of PNDs which include the LMU and/or premium traffic service.  The first deliverable is the hardware along with the software essential to the functionality of the hardware device delivered at the time of sale.  The second and potentially third deliverables are the LMU and/or premium traffic service. The Company has allocated revenue between these deliverables using the relative selling price method.  Amounts allocated to the delivered hardware and the related essential software are recognized at the time of sale provided the other conditions for revenue recognition have been met.  The revenue and associated cost of royalties allocated to the LMU and/or the subscription for premium traffic service are deferred and recognized on a straight-line basis over the estimated 36-month life of the products.
 
Prior to the third quarter of fiscal 2011, Garmin determined its estimate of selling price using the dealer/distributor price for nüMaps Lifetime or premium traffic subscriptions sold separately, and the prices for products bundled with and without the LMU and premium traffic service when comparable models were available, as inputs to the relative selling price method in a manner similar to VSOE.  The estimated selling price determined in this manner was used to defer revenues for all products bundled with the LMU and premium traffic service, as the number of bundled units sold as a percentage of total units sold was less significant and other indicators of selling price were not readily available.
 
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.
 
As the sales of nüMaps Lifetime and premium traffic subscriptions as a percentage of total unit sales or in the aggregate decreased significantly in mid-2011, the Company determined that the previous estimate of selling price based on more limited stand-alone sales of nüMaps Lifetime or premium traffic was no longer a sole determinant of its value as determined under VSOE, and that third party evidence of selling price was not available.  Management determined that the price differential between bundled and unbundled products and the royalty cost of the LMU or premium traffic subscription plus an approximate margin were both additional indicators of estimated selling price.  These estimates are also reflective of how the Company establishes product pricing based in part on customer perception of value of the added LMU or premium traffic service capability.  As such, beginning in the third quarter of 2011, the Company changed its estimate of selling price of the undelivered element to be based on the relative selling price method using a weighted average of the stand-alone sales price, the price differential between bundled and unbundled units, and the royalty or subscription cost plus a normal margin.
 
The impact in 2011 of the change in estimate for lifetime map updates and premium traffic service, as described above, was an increase in revenue, gross profit, net income, basic net income per share, and diluted net income per share of $77.8 million, $66.5 million, $59.3 million, $0.31, and $0.30, respectively.
 
Garmin records estimated reductions to revenue for customer sales programs, returns and incentive offerings including rebates, price protection (product discounts offered to retailers to assist in clearing older products from their inventories in advance of new product releases), promotions and other volume-based incentives.  The reductions to revenue are based on estimates and judgments using historical experience and expectation of future conditions.  Changes in these estimates could negatively affect Garmin’s operating results.   These incentives are reviewed periodically and, with the exceptions of price protection and certain other promotions, accrued for on a percentage of sales basis.   If market conditions were to decline, Garmin may take actions to increase customer incentive offerings, possibly resulting in an incremental reduction of revenue at the time the incentive is offered.
 
 
40

 
The Company records revenue net of sales tax, trade discounts and customer returns.  The reductions to revenue for expected future product returns are based on Garmin’s historical experience.
 
Trade Accounts Receivable
 
We sell our products to retailers, wholesalers, and other customers and extend credit based on our evaluation of each customer’s financial condition.  Potential losses on receivables are dependent on each individual customer’s financial condition.  We carry our trade accounts receivable at net realizable value.  Typically, our accounts receivable are collected within 80 days and do not bear interest.  We monitor our exposure to losses on receivables and maintain allowances for potential losses or adjustments.  We determine these allowances by (1) evaluating the aging of our receivables; and (2) reviewing our high-risk customers.  Past due receivable balances are written off when our internal collection efforts have been unsuccessful.  Beginning in 2011, the Company has maintained trade credit insurance to provide security against large losses.
 
Loan Receivable
 
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 April 2014 pursuant to the terms and conditions of the Agreement and subsequent amendment signed December 6, 2013.  As of December 28, 2013, the Company had a loan receivable balance of $137,369 from Bombardier, in the accompanying consolidated balance sheet.

 

Warranties

 
The Company provides for estimated warranty costs at the time of sale.  The Company’s standard warranty obligation to retail partners generally provides for a right of return of any product for a full refund in the event that such product is not merchantable, is damaged or defective.  The Company’s historical experience is that these types of warranty obligations are generally fulfilled within 5 months from time of sale.  The Company’s standard warranty obligation to its end-users provides for a period of one to two years from date of shipment while certain aviation products have a warranty period of two years from the date of installationThe Company’s estimate of costs to service its warranty obligations are based on historical experience and expectations of future conditions and are recorded as a liability on the balance sheet.  To the extent Garmin experiences increased warranty claim activity or increased costs associated with servicing those claims, its warranty accrual will increase, resulting in decreased gross profit.

 

Inventory

 
Garmin writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions.  If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
 
Investments
 
Investments are classified as available for sale and recorded at fair value, and unrealized investment gains and losses are reflected in stockholders’ equity.  Investment income is recorded when earned, and gains and losses are recognized when investments are sold.  Investments are reviewed periodically to determine if they have suffered an impairment of value that is considered other than temporary.   If investments are determined to be impaired, a loss is recognized at the date of determination.
 
Testing for impairment of investments requires significant management judgment.  The identification of potentially impaired investments, the determination of their fair value and the assessment of whether any decline in value is other than temporary are the key judgment elements.  The discovery of new information and the passage of time can significantly change these judgments.  Revisions of impairment judgments are made when new information becomes known, and any resulting impairment adjustments are made at that time.  The economic environment and volatility of securities markets increase the difficulty of determining fair value and assessing investment impairment.  Investments are discussed in detail in Note 3 of the Notes to Consolidated Financial Statements.
 
 
41

 

Income Taxes

 
Garmin provides deferred tax assets and liabilities based on the difference between the tax basis of assets and liabilities and their carrying amount for financial reporting purposes as measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.    It is Garmin’s policy to record a valuation allowance to reduce its deferred tax assets to an amount that it believes is more likely than not to be realized.  While Garmin has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event Garmin were to determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period such determination is made.  Likewise, should Garmin determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase income in the period such determination is made.
 
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations.  We recognize liabilities for tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes will be due.  If payment of these amounts ultimately proves not to be required, the reversal of the liabilities would result in tax benefits being recognized in the period when we determine the liabilities are no longer necessary.  If our estimate of tax liabilities proves to be less than the ultimate assessment, a further charge to expense would result.
 
Stock Based Compensation
 
Garmin awards stock options, stock appreciation rights (SARs), restricted stock units (RSUs) and/or performance shares each year as part of Garmin’s compensation package for employees.  Certain employees within Garmin are eligible for stock options, SAR grants, RSU grants and/or performance shares but the granting of options, SARs, RSUs and/or performance shares is at the discretion of the Compensation Committee of the Board of Directors and is not a contractual obligation. 
 
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period.  Determining the fair value of stock-based awards at the grant date requires judgment, including estimating expected life, forfeitures and dividends.  If actual results differ significantly from these estimates, stock-based compensation expense could be impacted.  Stock compensation plans are discussed in detail in Note 9 of the Notes to Consolidated Financial Statements.
 
Accounting Terms and Characteristics
 
Net Sales
 
Our net sales are primarily generated through sales to our global dealer and distributor network and to original equipment manufacturers.  Refer to the Revenue Recognition discussion above.  Our sales are largely of a consumer nature; therefore, backlog levels are not necessarily indicative of our future sales results.  We aim to achieve a quick turnaround on orders we receive, and we typically ship most orders within 72 hours.
 
Net sales are subject to seasonal fluctuation.  Typically, sales of our consumer products are highest in the second quarter, due to increased demand during the spring and summer season, and in the fourth quarter, due to increased demand during the holiday buying season.  Our aviation products do not experience much seasonal variation, but are more influenced by the timing of the release of new products when the initial demand is typically the strongest.
 
 
42

 

Cost of Sales/Gross Profit

 
Raw material costs are our most significant component of cost of goods sold.  In 2013, gross margin for our automotive/mobile segment increased 40 basis points driven primarily by the amortization of previously deferred high margin revenues partially offset by a positive impact to 2012 gross margin from a one-time royalty fee adjustment.  See Note 2 of the Notes to Consolidated Financial Statements for further information on gross profit deferrals.  In 2012, gross margin for our automotive/mobile segment increased 560 basis points driven primarily by the amortization of previously deferred high margin revenues, the third quarter 2011 change in estimate of per unit revenue and cost deferred as previously discussed and a one-time royalty fee adjustment.  In 2011, gross margin for our automotive/mobile segment declined 280 basis points driven primarily by the deferral of high margin revenue associated with bundled products, partially offset by the change in estimate mentioned above, and decreased selling prices on comparable units, as well as positive impact to 2010 gross margin from a refinement in the estimated warranty reserve.  
 
In 2013, we experienced an 860 basis point decline in marine gross margin due to significant pricing discounts on legacy inventory in the first half of 2013, competitive pricing dynamics on new products and product mix.  In 2012, we experienced a 320 and 260 basis point increase in aviation and fitness gross margins, respectively.  Aviation gross margin expansion was driven primarily by product mix and a OEM program contribution that negatively impacted gross margins in 2011. Fitness gross margin improvement was due to product mix.  In 2011, we experienced a 420 basis point decline in marine gross margin due to a shift in product mix.  Gross margins for the aviation, marine, outdoor, and fitness segments are typically more stable than in the automotive/mobile segment.  Our long-term gross margin targets are 70%, 55%, 60%, and 60%, respectively, for these segments.
 
Our existing practice of performing the design and manufacture of our products in-house has enabled us to source components from different suppliers and, where possible, to redesign our products to leverage lower cost components.  We believe that our flexible production model allows our Sijhih, Jhongli, and LinKou manufacturing plants in Taiwan, our Olathe, Kansas, and Salem, Oregon manufacturing plants to experience relatively low costs of manufacturing.  In general, products manufactured in Taiwan have been our highest volume products.  Our manufacturing labor costs historically have been lower in Taiwan than in Olathe and Salem.
 
Sales price variability has had and can be expected to have an effect on our gross profit.  In the past, prices of our devices sold into the automotive/mobile market have declined due to market pressures and introduction of new products sold at lower price points.  The average selling prices of our aviation, outdoor, fitness, and marine products have been stable due to product mix and the introduction of more advanced products sold at higher prices.  The effect of the sales price differences inherent within the mix of GPS-enabled products sold could have a significant impact on our gross profit.
 
Advertising Expense
 
Our advertising expenses consist of costs for both media advertising and cooperative advertising with our retail partners.  In both 2013 and 2012, we reduced our advertising expense due primarily to reduced cooperative advertising associated with lower volumes in the automotive/mobile segment.  In 2011, our advertising costs increased slightly as we again experienced revenue growth.  We expect advertising costs to increase slightly in 2014 with incremental spending associated with new product categories partially offset by decreased spending in the automotive/mobile segment.
 
Selling, General and Administrative Expenses
 
                Our selling, general and administrative expenses consist primarily of:
 
·      salaries for sales and marketing personnel;
·      salaries and related costs for executives and administrative personnel;
·      marketing, and other brand building costs;
 
 
43

 
·      accounting and legal costs;
·      information systems and infrastructure costs;
·      travel and related costs; and
·      occupancy and other overhead costs.
 
Selling, general and administrative expenses decreased in 2013 after increasing in both 2012 and 2011.  The 2013 decrease was primarily driven by reduced legal settlements and related fees.  The 2012 increase was primarily driven by full year expenses associated with acquisitions completed in the second half of 2011 and legal costs.  The 2011 increase was primarily driven by acquisitions, commissions associated with a new web-based sales program, bad debt expense, legal costs and product support costs. We expect selling, general and administrative costs, excluding advertising, to increase slightly in 2014 and remain consistent as a percentage of net sales.
 
Research and Development
 
The majority of our research and development costs represent salaries for our engineers, costs for high technology components and costs of test equipment used in product and prototype development.    Approximately 81% of the research and development of our products is performed in North America.  
 
We are committed to increasing the level of innovative design and development of new products as we strive for expanded ability to serve our existing consumer and aviation markets as well as new markets for GPS-enabled devices.  We expect our research and development budget to increase in 2014 due to our ongoing commitment to innovation and growth. 
 

Customers

 
Our top ten customers have contributed between 24% and 29% of net sales since 2011.  We have experienced average sales days in our customer accounts receivable of between 69 and 72 days since 2011.  We expect the level of customer accounts receivable days to be relatively stable in 2014. 

 

Income Taxes

 
We have experienced a relatively low effective corporate tax rate due to the proportion of our revenue generated by entities in tax jurisdictions with low statutory rates.   In particular,  the profit entitlement afforded our Swiss-based companies based on their intellectual property rights ownership of our consumer products along with tax incentives offered by the Taiwanese government on certain high-technology capital investments have continued to reduce our tax rate.  We have taken advantage of the tax benefit in Taiwan since our inception and we expect to continue to benefit from lower effective tax rates at least through 2015.  
 
Our consolidated effective tax rate was approximately 6.3% during 2013.  This is a decrease from an effective rate of 13.1% in 2012.  The significant decline was due to the impact of a $68.7 million benefit, which includes the release of uncertain tax position reserves from 2009 offset by Taiwan surtax expense due to this reserve release.  Excluding these items, we would have reported an effective tax rate of 16.8% for fiscal year 2013 compared to 13.1% for fiscal year 2012.  This increase was primarily driven by an unfavorable income mix across tax jurisdictions, reduced Taiwanese tax incentives, and the release of other uncertain tax position reserves, amounting to approximately $11.2 million for 2013 and $13.0 million for 2012 that are considered immaterial, tend to be more recurring in nature and are comparable between periods.  These factors were partially offset by the impact of $6.3 million of research and development tax credits related to 2012 which were recognized when the related legislation was enacted in January 2013.  
 
Management believes that the effective tax rate for fiscal 2014 will be consistent with the 2013 effective tax rate of 16.8%, excluding special items as outlined above, as operating profits and margins are relatively stable.  The actual effective tax rate will depend upon the operating margins, production volume, additional capital investments made during fiscal 2014, the resolution of uncertain tax positions and the composition of our earnings.
 
 
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Results of Operations
 
The following table sets forth our results of operations as a percentage of net sales during the periods shown (the table may not foot due to rounding):
 
 
 
Fiscal Years Ended
 
 
 
Dec. 28,
 
 
Dec. 29,
 
 
Dec. 31,
 
 
 
2013
 
 
2012
 
 
2011
 
Net sales
 
100
%
 
100
%
 
100
%
Cost of goods sold
 
47
%
 
47
%
 
51
%
Gross profit
 
53
%
 
53
%
 
49
%
Operating expenses:
 
 
 
 
 
 
 
 
 
Advertising
 
4
%
 
5
%
 
5
%
Selling, general and administrative
 
14
%
 
14
%
 
12
%
Research and development
 
14
%
 
12
%
 
11
%
Total operating expenses
 
32
%
 
31
%
 
28
%
Operating income
 
22
%
 
22
%
 
20
%
Other income / (expense) , net
 
3
%
 
1
%
 
1
%
Income before income taxes
 
25
%
 
23
%
 
21
%
Provision for income taxes
 
2
%
 
3
%
 
2
%
Net income
 
23
%
 
20
%
 
19
%
 
The following table sets forth our results of operations through income before income taxes for each of our five segments during the period shown.   For each line item in the table the total of the segments’ amounts equals the amount in the consolidated statements of income data included in Item 6.
 
 
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Fiscal year ended December 28, 2013
 
Outdoor
 
Fitness
 
Marine
 
Automotive/
Mobile
 
Aviation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
410,989
 
$
356,283
 
$
222,928
 
$
1,302,314
 
$
339,337
 
Cost of goods sold
 
 
148,460
 
 
133,358
 
 
107,837
 
 
737,231
 
 
97,665
 
Gross profit
 
 
262,529
 
 
222,925
 
 
115,091
 
 
565,083
 
 
241,672
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
 
19,805
 
 
24,153
 
 
11,435
 
 
52,478
 
 
5,034
 
Selling, general and administrative expenses
 
 
59,058
 
 
50,765
 
 
38,578
 
 
187,449
 
 
19,590
 
Research and development
 
 
24,469
 
 
27,757
 
 
46,585
 
 
136,639
 
 
129,473
 
Total expenses
 
 
103,332
 
 
102,675
 
 
96,598
 
 
376,566
 
 
154,097
 
Operating income
 
 
159,197
 
 
120,250
 
 
18,493
 
 
188,517
 
 
87,575
 
Other income / (expense), net
 
 
9,352
 
 
11,161
 
 
7,500
 
 
46,005
 
 
5,508
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
168,549
 
$
131,411
 
$
25,993
 
$
234,522
 
$
93,083
 
 
Fiscal year ended December 29, 2012
 
Outdoor
 
Fitness
 
Marine
 
Automotive/
Mobile
 
Aviation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
401,747
 
$
321,788
 
$
208,136
 
$
1,492,440
 
$
291,564
 
Cost of goods sold
 
 
141,183
 
 
117,173
 
 
82,935
 
 
849,527
 
 
86,377
 
Gross profit
 
 
260,564
 
 
204,615
 
 
125,201
 
 
642,913
 
 
205,187
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
 
20,812
 
 
25,322
 
 
14,804
 
 
72,817
 
 
5,002
 
Selling, general and administrative expenses
 
 
54,535
 
 
43,943
 
 
33,540
 
 
220,669
 
 
17,103
 
Research and development
 
 
20,606
 
 
23,543
 
 
42,857
 
 
128,661
 
 
110,106
 
Total expenses
 
 
95,953
 
 
92,808
 
 
91,201
 
 
422,147
 
 
132,211
 
Operating income
 
 
164,611
 
 
111,807
 
 
34,000
 
 
220,766
 
 
72,976
 
Other income / (expense), net
 
 
3,123
 
 
2,467
 
 
1,725
 
 
10,852
 
 
2,201
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
167,734
 
$
114,274
 
$
35,725
 
$
231,618
 
$
75,177
 
 
Fiscal year ended December 31, 2011
 
Outdoor
 
Fitness
 
Marine
 
Automotive/ 
Mobile
 
Aviation
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
363,223
 
$
298,163
 
$
221,730
 
$
1,590,598
 
$
284,855
 
Cost of goods sold
 
 
124,373
 
 
116,404
 
 
92,077
 
 
993,581
 
 
93,542
 
Gross profit
 
 
238,850
 
 
181,759
 
 
129,653
 
 
597,017
 
 
191,313
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Advertising
 
 
16,739
 
 
18,831
 
 
11,310
 
 
93,456
 
 
4,688
 
Selling, general and administrative expenses
 
 
43,181
 
 
38,495
 
 
30,990
 
 
212,545
 
 
16,006
 
Research and development
 
 
17,419
 
 
22,332
 
 
29,708
 
 
130,179
 
 
98,946
 
Total expenses
 
 
77,339
 
 
79,658
 
 
72,008
 
 
436,180
 
 
119,640
 
Operating income
 
 
161,511
 
 
102,101
 
 
57,645
 
 
160,837
 
 
71,673
 
Other income / (expense), net
 
 
9,734
 
 
5,780
 
 
2,447
 
 
10,880
 
 
1,553
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes
 
$
171,245
 
$
107,881
 
$
60,092
 
$
171,717
 
$
73,226
 
 
 
46

 
Comparison of 52-Weeks Ended December 28, 2013 and December 29, 2012
 
Net Sales
 
 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Net Sales
 
% of Revenues
 
 
Net Sales
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
410,989
 
16
%
 
$
401,747
 
15
%
 
$
9,242
 
2
%
 
Fitness
 
 
356,283
 
14
%
 
 
321,788
 
12
%
 
 
34,495
 
11
%
 
Marine
 
 
222,928
 
8
%
 
 
208,136
 
7
%
 
 
14,792
 
7
%
 
Automotive/Mobile
 
 
1,302,314
 
49
%
 
 
1,492,440
 
55
%
 
 
(190,126)
 
-13
%
 
Aviation
 
 
339,337
 
13
%
 
 
291,564
 
11
%
 
 
47,773
 
16
%
 
Total
 
$
2,631,851
 
100
%
 
$
2,715,675
 
100
%
 
$
(83,824)
 
-3
%
 
 
                Net sales decreased 3% in 2013 when compared to the year-ago period.  The decrease was driven by the automotive/mobile segment which posted a 13% decline with offsetting growth in outdoor, fitness, marine and aviation.  Automotive/mobile revenue remains the largest portion of our revenue mix at 49% in 2013, compared to 55% in 2012.    
 
Total unit sales decreased 10% to 13.9 million units in 2013 from 15.4 million units in 2012.  The decrease in unit sales volume was attributable to reduced automotive/mobile volumes due to penetration rates and competing technologies.  This decline was partially offset by growth in each of the other segments. 
 
                Automotive/mobile segment revenue decreased 13% from the year-ago period, as volumes decreased 17% partially offset by average selling price (ASP) improvement due to the amortization of previously deferred revenue exceeding current year revenue deferrals in 2013 and increased auto OEM contribution with a higher ASP. 
 
                Aviation revenues increased 16% from the year-ago period as the OEM market improved in some aircraft categories, as well as contribution from recent share gains and aftermarket products.  Fitness revenues increased 11% on the strength of our cycling products, power meter, and the Forerunner 10 with strong volume growth partially offset by reduced ASPs associated with the Forerunner 10. Revenues in our marine segment increased 7% as new product introductions were partially offset by a weak first quarter when we discounted many products in advance of new products and a global marine electronics industry that continues to be weak due to macroeconomic instability. 
 
The Company anticipates revenue of $2.6 - $2.7 billion in 2014 driven by growth in the outdoor, fitness, aviation and marine segments offset by ongoing declines in the automotive/mobile segment.  In general, management believes that continuous innovation and the introduction of new products are essential for future revenue growth.
 

Cost of Goods Sold

 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Cost of Goods
 
% of Revenues
 
 
Cost of Goods
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
148,460
 
36
%
 
$
141,183
 
35
%
 
$
7,277
 
5
%
 
Fitness
 
 
133,358
 
37
%
 
 
117,173
 
36
%
 
 
16,185
 
14
%
 
Marine
 
 
107,837
 
48
%
 
 
82,935
 
40
%
 
 
24,902
 
30
%
 
Automotive/Mobile
 
 
737,231
 
57
%
 
 
849,527
 
57
%
 
 
(112,296)
 
-13
%
 
Aviation
 
 
97,665
 
29
%
 
 
86,377
 
30
%
 
 
11,288
 
13
%
 
Total
 
$
1,224,551
 
47
%
 
$
1,277,195
 
47
%
 
$
(52,644)
 
-4
%
 

 

 
47

 
Cost of goods sold decreased 4% when compared to the year ago period.  As a percentage of revenue, cost of goods sold decreased 50 basis points from the year ago period.   Cost of goods as a percentage of revenue for outdoor and fitness were negatively impacted by product mix and slight ASP declines.  Cost of goods as a percentage of revenues increased by 850 basis points in marine due to significant pricing discounts on legacy inventory in the first half of 2013, competitive pricing dynamics on new products and rising component costs.  The automotive/mobile segment recorded a 13% decline in cost of goods in absolute dollars as revenues declined 13%.  Cost of goods as a percentage of revenues for the automotive/mobile segment decreased by 30 basis points as the effect of a $21 million one-time royalty fee benefit related to license fee overpayments recorded in the second quarter of 2012 was offset by the benefit from the amortization of previously deferred high margin revenue and the associated costs exceeding new deferrals on current period sales in 2013.  The aviation segment experienced an absolute dollar cost of goods sold increase generally commensurate with the sales increase discussed above.
 
Management believes that cost of goods sold as a percentage of sales will be relatively stable in 2014 given the growth in segments with higher margin profiles than corporate average, product mix within those segments and current component pricing. 
 

Gross Profit

 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Gross Profit
 
% of Revenues
 
 
Gross Profit
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
262,529
 
64
%
 
$
260,564
 
65
%
 
$
1,965
 
1
%
 
Fitness
 
 
222,925
 
63
%
 
 
204,615
 
64
%
 
 
18,310
 
9
%
 
Marine
 
 
115,091
 
52
%
 
 
125,201
 
60
%
 
 
(10,110)
 
-8
%
 
Automotive/Mobile
 
 
565,083
 
43
%
 
 
642,913
 
43
%
 
 
(77,830)
 
-12
%
 
Aviation
 
 
241,672
 
71
%
 
 
205,187
 
70
%
 
 
36,485
 
18
%
 
Total
 
$
1,407,300
 
53
%
 
$
1,438,480
 
53
%
 
$
(31,180)
 
-2
%
 

 
                Gross profit dollars in 2013 decreased 2% while gross profit margin increased 50 basis points compared to 2012 driven primarily by the automotive/mobile and aviation segments.  The automotive/mobile gross margin was stable at 43% as the royalty benefit recorded in the second quarter of 2012 was offset by increased amortization of previously deferred high margin revenues in 2013, as discussed above.  The gross profit margin percentage for the marine segment declined by 850 basis points as discussed above. 

 

Management believes that total company gross margins will be relatively stable in 2014 as discussed above. 

 

Advertising Expenses

 

 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Advertising
Expense
 
% of Revenues
 
 
Advertising
Expense
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
19,805
 
5
%
 
$
20,812
 
5
%
 
$
(1,007)
 
-5
%
 
Fitness
 
 
24,153
 
7
%
 
 
25,322
 
8
%
 
 
(1,169)
 
-5
%
 
Marine
 
 
11,435
 
5
%
 
 
14,804
 
7
%
 
 
(3,369)
 
-23
%
 
Automotive/Mobile
 
 
52,478
 
4
%
 
 
72,817
 
5
%
 
 
(20,339)
 
-28
%
 
Aviation
 
 
5,034
 
1
%
 
 
5,002
 
2
%
 
 
32
 
1
%
 
Total
 
$
112,905
 
4
%
 
$
138,757
 
5
%
 
$
(25,852)
 
-19
%
 

 
Advertising expense decreased 19% in absolute dollars and 80 basis points as a percent of revenue compared to the year-ago period.  The decrease occurred primarily in the automotive/mobile and marine segments due to reduced cooperative advertising associated with lower volumes in automotive/mobile and a newer product line in marine requiring less promotional activity. 
 
Management expects to increase advertising as a percentage of sales in 2014 with incremental spending associated with new product categories partially offset by decreased spending in the automotive/mobile segment.
 
 
48

 

Selling, General and Administrative Expenses

 
 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Selling, General &
Admin. Expenses
 
% of Revenues
 
 
Selling, General &
Admin. Expenses
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
59,058
 
14
%
 
$
54,535
 
14
%
 
$
4,523
 
8
%
 
Fitness
 
 
50,765
 
14
%
 
 
43,943
 
14
%
 
 
6,822
 
16
%
 
Marine
 
 
38,578
 
17
%
 
 
33,540
 
16
%
 
 
5,038
 
15
%
 
Automotive/Mobile
 
 
187,449
 
14
%
 
 
220,669
 
15
%
 
 
(33,220)
 
-15
%
 
Aviation
 
 
19,590
 
6
%
 
 
17,103
 
6
%
 
 
2,487
 
15
%
 
Total
 
$
355,440
 
14
%
 
$
369,790
 
14
%
 
$
(14,350)
 
-4
%
 
 
                Selling, general and administrative expense decreased 4% in absolute dollars and 10 basis points as a percent of revenues compared to the year-ago period.  The absolute dollar decrease is primarily related to reduced legal settlements and legal fees in the automotive/mobile segment. The increase in aviation is partially related to an increase in bad debt expense.  Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues.
 
Management expects selling, general and administrative expenses to be relatively stable as a percentage of sales in 2014.
 
Research and Development Expense
 
 
 
52-weeks ended December 28, 2013
 
 
52-weeks ended December 29, 2012
 
 
Year over Year
 
 
 
 
Research &
Development
 
% of Revenues
 
 
Research &
Development
 
% of Revenues
 
 
$ Change
 
% Change
 
 
Outdoor
 
$
24,469
 
6
%
 
$
20,606
 
5
%
 
$
3,863
 
19
%
 
Fitness
 
 
27,757
 
8
%
 
 
23,543