United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 27, 2015
or
For the transition period from to
Commission file number 0-31983
GARMIN LTD.
(Exact name of Company as specified in its charter)
Switzerland
(State or other jurisdiction
of incorporation or organization)
98-0229227
(I.R.S. Employer identification no.)
Mühlentalstrasse 2
8200 Schaffhausen
(Address of principal executive offices)
N/A
(Zip Code)
Company's telephone number, including area code: +41 52 630 1600
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þNO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þAccelerated Filer ¨Non-accelerated Filer ¨(Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
Number of shares outstanding of the registrant’s common shares as of July 27, 2015
CHF 10.00 par value: 208,077,418 (including treasury shares)
Garmin Ltd.
Form 10-Q
Quarter Ended June 27, 2015
Table of Contents
Part I - Financial Information
Item I - Condensed Consolidated Financial Statements
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share information)
See accompanying notes.
Condensed Consolidated Statements of Income (Unaudited)
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(In thousands)
Condensed Consolidated Statements of Cash Flows (Unaudited)
Garmin Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 27, 2015
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week and 26-week periods ended June 27, 2015 are not necessarily indicative of the results that may be expected for the year ending December 26, 2015.
The condensed consolidated balance sheet at December 27, 2014 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.
The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore the financial results of certain fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended June 27, 2015 and June 28, 2014 both contain operating results for 13 weeks.
The components of inventories consist of the following:
The following table sets forth the computation of basic and diluted net income per share:
There were 3,558 and 2,230 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended June 27, 2015 and June 28, 2014, respectively.
There were 3,598 and 2,277 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 26-week periods ended June 27, 2015 and June 28, 2014, respectively.
There were 91 and 124 shares issued as a result of exercises and releases of equity awards for the 13-week periods ended June 27, 2015 and June 28, 2014, respectively.
There were 128 and 366 shares issued as a result of exercises and releases of equity awards for the 26-week periods ended June 27, 2015 and June 28, 2014, respectively.
There were 214 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 13-week and 26-week periods ended June 27, 2015.
The Company has identified five reportable segments – Auto, Aviation, Marine, Outdoor and Fitness. The Company’s Chief Operating Decision Maker (CODM), assesses segment performance and allocates resources to each segment individually.
During the fiscal quarter ended June 27, 2015, the measure of segment profit or loss used by the CODM to assess segment performance and allocate resources changed from income before income taxes to operating income. This change did not impact the measurement methods used to determine reported segment profit or loss in the 13-week and 26-week periods ended June 27, 2015 and June 28, 2014.
Net sales, gross profit, and operating income for each of the Company’s reportable segments are presented below:
Net Sales, Gross Proft and Operating Income by Segment (Unaudited)
Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.
Net sales and property and equipment, net by geographic area are as follows as of and for the 26-week periods ended June 27, 2015 and June 28, 2014. Note that APAC includes Asia Pacific and EMEA includes Europe, the Middle East and Africa:
The Company’s products sold are generally covered by a warranty for periods ranging from one to two years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectation of future conditions and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.
The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, investments in certain low income housing tax credit projects, and other indirect purchases in connection with conducting our business. Pursuant to these agreements, the Company is contractually committed to make payments of approximately $333,281 over the next five years. Subsequent to June 27, 2015, a portion of a commitment was satisfied with a $43,000 prepayment to a supplier, all of which will be classified as a noncurrent asset.
In the normal course of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual or disclosure. The assessment regarding whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events.
Management of the Company currently does not believe there is at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies individually and in the aggregate, for the fiscal quarter ended June 27, 2015. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. Although management considers the likelihood to be remote, an adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.
The Company settled or resolved certain matters during the fiscal quarter ended June 27, 2015 that did not individually or in the aggregate have a material impact on the Company’s financial condition or results of operations.
The Company’s income tax expense increased by $9,068, to $35,805 for the 13-week period ended June 27, 2015, from $26,737 for the 13-week period ended June 28, 2014. The effective tax rate was 20.6% in the second quarter of 2015 compared to 12.8% in the second quarter of 2014. The second quarter 2015 effective tax rate increased compared to the second quarter 2014 due to the release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reducing our expense by $1,637 and $5,190, respectively, in second quarter 2015 and second quarter 2014. In addition, the second quarter 2015 effective tax rate increased as compared to second quarter 2014 due to the current projected full year income mix for 2015 compared to the same projection at second quarter of 2014.
Our income tax expense decreased by $5,179 to $45,208 for the first half of 2015, from $50,387 for the first half of 2014. The effective tax rate was 18.1% in the first half of 2015 compared to 14.3% in the first half of 2014. The first half 2015 effective tax rate increased as compared to first half of 2014 due to the release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reducing our expense by $6,924 and $10,985, respectively, in the first half of 2015 and the first half of 2014. The first half 2015 effective tax rate increased as compared to first half 2014 primarily due to the current projected full year income mix for 2015 compared to the same projection at second quarter of 2014.
The FASB ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.
The method described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at the reporting date.
Available-for-sale securities measured at estimated fair value on a recurring basis are summarized below:
(1) Certain available-for-sale securities held as of December 27, 2014 have been reclassified among major security types to conform to the current year presentation. These reclassifications had no effect on fair value measurement.
Marketable securities classified as available-for-sale securities are summarized below:
Gross Unrealized
Gains
Gross
Unrealized
Losses-OTTI(2)
Losses- Other (3)
Estimated Fair
Value (Net
Carrying
Amount)
The Company’s investment policy requires investments to be rated A or better with the objective of minimizing the potential risk of principal loss. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities that have an unrealized loss shown in the table above and it is not more likely than not that the Company will be required to sell the investment before recovery of their amortized costs bases, which may be maturity.
The Company recognizes the credit component of other-than-temporary impairments of debt securities in "Other Income" and the noncredit component in "Other comprehensive income (loss)" for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During 2014 and the 26-week period ended June 27, 2015, the Company did not record any material impairment charges on its outstanding securities.
The amortized cost and estimated fair value of the securities at an unrealized loss position at June 27, 2015 were $1,175,780 and $1,156,465, respectively. Approximately 56% of securities in our portfolio were at an unrealized loss position at June 27, 2015. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no impairment has been recorded in the accompanying condensed consolidated statement of income.
The cost of securities sold is based on the specific identification method.
The following table displays additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of June 27, 2015.
Losses
The amortized cost and estimated fair value of marketable securities at June 27, 2015, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
9. Share Repurchase Plan
On February 13, 2015, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $300,000 of the common shares of Garmin Ltd. The repurchases may be made from time to time as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The timing and amounts of any repurchases will be determined by the Company’s management depending on market conditions and other factors including price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. The share repurchase authorization expires on December 31, 2016. As of June 27, 2015, the Company had repurchased 1,221 shares using cash of $57,295. There remains approximately $242,705 available to repurchase additional shares under this authorization.
10. Accumulated Other Comprehensive Income
The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week and the 26-week periods ended June 27, 2015:
(4) Represents the change in impairment, not related to credit, for those investment securities that have been determined to be other-than- temporarily impaired.
(5) Represents the change in unrealized gains (losses) on investment securities that have not been determined to be other-than-temporarily impaired.
The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 26-week periods ended June 27, 2015:
11. Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers” (ASU 2014-09), which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company will recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange or transferring goods or services to a customer. In applying the new guidance, a company will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The provisions of this new guidance are effective for reporting periods beginning after December 15, 2017 and can be adopted using either a full retrospective or modified approach. The Company is currently evaluating the impact of adopting this new guidance on the Company’s financial statements.
In February 2015, Restricted Stock Units (RSUs) were granted to certain employees under the Company’s 2005 Equity Incentive Plan (the “2005 Plan”). The vesting of these RSUs is contingent upon the achievement of certain revenue and profitability goals, as well as on time-based vesting requirements. The compensation expense related to these grants did not have a material impact on the results of operations for the 13-week or 26-week periods ended June 27, 2015 and is not expected to have a material impact on the results of operations for the fiscal year ending December 26, 2015. The 2005 Plan is discussed further in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by our management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of our assumptions prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's web site on the World Wide Web at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.
The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 27, 2014.
The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five business segments, the outdoor, fitness, marine, auto and aviation markets. Our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.
Results of Operations
The following table sets forth our results of operations as a percentage of net sales during the periods shown:
The Company manages its operations in five segments: outdoor, fitness, marine, auto, and aviation, and each of its segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The segment table located in Note 4 sets forth our results of operations (in thousands) including revenue (net sales), operating income, and income before taxes for each of our five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, auto, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.
Comparison of 13-Weeks Ended June 27, 2015 and June 28, 2014
(Dollar amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net Sales
Net sales decreased 1% for the 13-week period ended June 27, 2015 when compared to the year-ago quarter. All segments, excluding aviation, were impacted by revenues denominated in currencies that have weakened against the U.S. Dollar. In total, it is estimated that the strong U.S. Dollar reduced revenues by approximately $59 million, which represents over 750 basis points. Auto revenue remains the largest portion of our revenue mix at 39% in the second quarter of 2015 compared to 45% in the second quarter of 2014.
Total unit sales increased to 4,150 in the second quarter of 2015 from 3,841 in the same period of 2014. Unit sales volume in the second quarter of fiscal 2015 primarily grew in fitness and marine.
Auto segment revenue decreased 15% from the year-ago quarter, as both PND volumes and the contribution of amortization of previously deferred revenue declined when compared to second quarter 2014. Revenues in our fitness segment increased 5% from the year-ago quarter on the strength of wellness products and multisport products. Revenues in our marine segment increased 41% due to new product introductions and the Fusion® Electronics acquisition which was completed in the back half of 2014. Aviation revenues increased 5% from the year-ago quarter as gains in aftermarket were partially offset by OEM weakness. Outdoor revenues increased 4% from the year-ago quarter with growth in our wearable products more than offsetting weakness in the handheld and golf business.
Cost of Goods Sold
Cost of goods sold increased 300 basis points as a percentage of revenue from the year ago quarter with increases primarily in the fitness and auto segments, while increasing 6% in absolute dollars. Cost of goods as a percentage of revenue increased in part due to a stronger U.S. Dollar that created downward pressure on revenue in all segments excluding aviation as discussed above. The absolute dollar increase of 6% reflects increased unit sales and product mix.
In the auto segment, the 8% cost of goods sold decrease reflects lower PND shipments partially offset by product mix shift toward software-focused OEM solutions. In the fitness segment, the 33% cost of goods sold increase reflects strong volume growth partially offset by product mix shift toward lower cost per unit activity trackers. In the marine segment, the 44% cost of goods sold increase reflects strong volume growth partially offset by product mix shift toward lower cost per unit Fusion® entertainment products. In the outdoor segment, the 5% increase in cost of goods sold reflects product mix shift toward higher cost per unit wearables partially offset by inventory reserves recorded in the second quarter of 2014 which negatively impacted cost of goods in that period. The 9% increase in cost of goods sold for aviation was largely consistent with the segment revenue growth.
Gross Profit
Gross profit dollars in the second quarter of 2015 decreased 6% while gross profit margin decreased 300 basis points compared to the second quarter of 2014. Fitness and auto suffered gross margin decline, as discussed above. Outdoor, marine, and aviation gross margins were relatively stable to prior year results, as discussed above.
Advertising Expense
Advertising expense increased 31% in absolute dollars and 140 basis points as a percent of revenues. The increase in absolute dollars primarily occurred in fitness and marine to support new product introductions with increased media spend, point of sale presence at key retailers and cooperative advertising. This increase was partially offset by decreased spending in outdoor due to higher spending in second quarter of 2014 to support new product introductions.
Selling, General and Administrative Expense
Selling, general and administrative expense increased 6% in absolute dollars and 70 basis points as a percent of revenues compared to the year-ago quarter. The absolute dollar increase is related to product support, legal fees associated with the defense of multiple matters, and IT. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues.
Research and Development Expense
Research and development expense increased 11% due to ongoing development activities for new products and the addition of more than 100 new engineering personnel to our staff since the year-ago quarter. In absolute dollars, research and development costs increased $10.8 million when compared with the year-ago quarter and increased as a percent of revenue by 150 basis points. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.
Operating Income
Operating income decreased 24% in absolute dollars and 660 basis points as a percent of revenue when compared to the second quarter of 2014. Declines in the gross margin percentage, as discussed above, coupled with increases in all categories of operating expense, contributed to the decline.
Other Income (Expense)
The average return on cash and investments during the second quarter of 2015 was 1.2% compared to 1.4% during the same quarter of 2014. Lower interest income in the second quarter of 2015, as compared to the same period of 2014, is due to a reduced interest rate and a lower cash balance.
Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation. The U.S. Dollar is the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most European subsidiaries. As these entities have grown, currency fluctuations can generate material gains and losses. Additionally, Euro-based inter-company transactions can also generate currency gains and losses. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.
The $0.5 million currency loss in the second quarter 2015 was due to the U.S. Dollar weakening against both the Taiwan Dollar and the Euro. During the second quarter of 2015, the U.S. Dollar weakened 2.8% compared to the Euro resulting in a gain of $6.0 million while the U.S. Dollar weakened against the Taiwan Dollar 0.6% resulting in a loss of $6.4 million. The remaining net currency loss of $0.1 million is related to other currencies and timing of transactions.
The majority of the $20.4 million currency loss in the second quarter of 2014 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar. The strengthening of the U.S. Dollar compared to the Euro contributed a loss as well, which was partially offset by the U.S. Dollar weakening compared to the British Pound Sterling. During the second quarter of 2014, the U.S. Dollar weakened 2.0% compared to the Taiwan Dollar resulting in a loss of $18.3 million. In addition, the U.S. Dollar strengthened 0.8% compared to the Euro and weakened 2.5% compared to the British Pound Sterling resulting in a net loss of $2.2 million. The remaining net currency gain of $0.1 million is related to other currencies and timing of transactions.
Income Tax Provision
Our income tax expense increased by $9.1 million, to $35.8 million for the 13-week period ended June 27, 2015, from $26.7 million for the 13-week period ended June 28, 2014. The effective tax rate was 20.6% in the second quarter of 2015 compared to 12.8% in the second quarter of 2014. The second quarter 2015 effective tax rate increased compared to second quarter 2014 due to the release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reducing our expense by $1.6 million and $5.2 million, respectively, in second quarter 2015 and second quarter 2014. The second quarter 2015 effective tax rate increased as compared to second quarter 2014 due to the current projected full year income mix for 2015 compared to the same projection at second quarter of 2014.
Net Income
As a result of the above, net income decreased 24% for the 13-week period ended June 27, 2015 to $137.8 million compared to $182 million for the 13-week period ended June 28, 2014.
Comparison of 26-Weeks Ended June 27, 2015 and June 28, 2014
(Amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net sales did not change materially for the 26-week period ended June 27, 2015 when compared to the year-ago period. All segments, excluding aviation, experienced significant declines due to revenues denominated in currencies that have weakened against the U.S. Dollar. In total, the strong U.S. Dollar reduced revenues by approximately $97 million, which represents over 700 basis points. Auto revenue remains the largest portion of our revenue mix at 38% in the first half of 2015 compared to 44% in the first half of 2014.
Total unit sales increased 13% to 7,194 in the first half of 2015 from 6,340 in the same period of 2014. The increase in unit sales volume was attributable to fitness and marine volumes partially offset by declines in each of the other segments.
Auto segment revenue decreased 13% from the year-ago period, as both the contribution of amortization of previously deferred revenue declined when compared to first half 2014 and volumes declined. Fitness revenues increased 15% on the strength of our vivo line of products and multisport offset by declines in our runner and bike categories, which experienced significant growth in the first half of 2014 due to new product introductions. Aviation revenues increased 4% from the year-ago period as OEM market share gains and aftermarket products contributed to growth. Outdoor revenues decreased 2% from the year-ago period due to declines in the handheld and golf product categories. Revenues in our marine segment increased 26% as the release of new marine products drove strong revenue growth and the Fusion® Electronics acquisition was integrated when compared to the same period of 2014.
Cost of goods sold increased 2% in absolute dollars for the first half of 2015 when compared to the year ago period.
In the auto segment, the cost of goods decline was largely consistent with the segment revenue decline. In the fitness segment, the cost of goods increase outpaced revenue growth due to product mix and competitive pricing dynamics. In the outdoor segment, the cost of goods decreases were largely consistent with the revenue decline when excluding the impact of the inventory reserves recorded in the second quarter of 2014. The cost of goods increases in marine and aviation were largely consistent with the segment revenue growth.
Gross profit dollars in the first half of 2015 decreased 2% while gross profit margin decreased 80 basis points compared to the first half of 2014. The auto gross margin declined slightly to 46% driven by the lower amortization of previously deferred high margin revenues, as discussed above. Outdoor margins increased while fitness, marine and aviation margins declined, as discussed above.
Advertising expense increased 24% in absolute dollars and 100 basis points as a percent of revenue compared to the year-ago period. The increase in absolute dollars primarily occurred in fitness and marine to support new product introductions with increased media spend, point of sale presence at key retailers and cooperative advertising. This increase was partially offset by decreased spending in outdoor due to higher spending in second quarter of 2014 to support new product introductions.
Selling, General and Administrative Expenses
Selling, general and administrative expense increased 8% in absolute dollars and 100 basis points as a percent of revenues compared to the year-ago period. The absolute dollar increase is related to product support and legal fees associated with the defense of multiple matters. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues.
Research and development expense increased 11% due to ongoing development activities for new products and the addition of over 100 new engineering personnel to our staff since the year-ago period. In absolute dollars, research and development costs increased $20.7 million when compared with the year-ago period and increased 150 basis point as a percent of revenues compared to the year-ago period. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.
Operating income declined 18% in absolute dollars and 440 basis points as a percent of revenue when compared to the year-ago period. Declining gross margin percentages and increases in all operating expenses as a percentage of revenue, as discussed above, contributed to the decline.
The average return on cash and investments during the first half of 2015 was 1.2% compared to 1.3% during the same period of 2014. The decrease in interest income is attributable to decreasing cash balances and a slight decrease in interest rates.
The majority of the $44.8 million currency loss in the first half of 2015 was due to the strengthening of the U.S. Dollar against the Euro in congruence with the U.S. Dollar weakening against the Taiwan Dollar. During the first half of 2015, the U.S. Dollar strengthened 8.3% compared to the Euro resulting in a loss of $25.0 million while weakening against the Taiwan Dollar by 2.5% resulting in a loss of $20.5 million. The remaining net currency gain of $0.7 million is related to other currencies and timing of transactions.
The majority of the $7.6 million currency loss in the first half of 2014 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar. The strengthening of the U.S. Dollar compared to the Euro contributed a loss as well, which was partially offset by the U.S. Dollar weakening compared to the British Pound Sterling. During the first half of 2014, the U.S. Dollar weakened 0.5% compared to the Taiwan Dollar resulting in a loss of $4.9 million. In addition, the U.S. Dollar strengthened 0.9% compared to the Euro and weakened 3.4% compared to the British Pound Sterling resulting in a net loss of $2.9 million. The remaining net currency gain of $0.2 million is related to other currencies and timing of transactions.
Our income tax expense decreased by $5.2 million, to $45.2 million for the first half of 2015, from $50.4 million for the first half of 2014. The effective tax rate was 18.1% in the first half of 2015 compared to 14.3% in the first half of 2014. The first half 2015 effective tax rate increased as compared to first half of 2014 due to the release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reducing our expense by $6.9 million and $11.0 million, respectively, in the first half of 2015 and the first half of 2014. The first half 2015 effective tax rate also increased as compared to first half 2014 due to the current projected full year income mix for 2015 compared to the same projection at second quarter of 2014.
As a result of the above, net income declined 32% for the 26-week period ended June 27, 2015 to $204.5 million compared to $300.8 million for the 26-week period ended June 28, 2014.
Liquidity and Capital Resources
Operating Activities
The $251.1 million decrease in cash provided by operating activities in first half 2015 compared to first half 2014 was primarily due to the following:
Partially offset by:
Investing Activities
The $148.6 million decrease in cash provided by investing activities in the first half 2015 compared to the first half of 2014 was primarily due to the following:
It is management’s goal to invest the on-hand cash consistent with Garmin’s investment policy, which has been approved by the Board of Directors. The investment policy’s primary purpose is to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during first half 2015 and 2014 were approximately 1.2% and 1.3%, respectively.
Financing Activities
The $102.7 million decrease in cash used in financing activities in the first half of 2015 compared to the first half of 2014 was primarily due to the following:
We currently use cash flow from operations to fund our capital expenditures, to support our working capital requirements, to pay dividends, and to fund share repurchases. We expect that future cash requirements will principally be for capital expenditures, working capital, payment of dividends declared, share repurchases and the funding of strategic acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There are numerous market risks that can affect our future business, financial condition and results of operations. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part II, “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014. There have been no material changes during the 13-week period ended June 27, 2015 in the risks described in our Annual Report on Form 10-K related to market sensitivity, inflation, foreign currency exchange rate risk and interest rate risk.
Item 4. Controls and Procedures
(a)Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of June 27, 2015, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of June 27, 2015 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended June 27, 2015 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II - Other Information
Item 1. Legal Proceedings
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 (“Harbinger”) 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. The Coalition to Save Our GPS is no longer a defendant. Plaintiffs filed a first amended complaint on August 16, 2013, a second amended complaint on January 21, 2014, and a third amended complaint on March 18, 2014. The third amended complaint 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, constructive fraud, 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.
On November 1, 2013, LightSquared, Inc. and two related entities (collectively, “LightSquared”) filed an adversary proceeding (the “LightSquared Lawsuit”) 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 filed a first amended complaint on March 18, 2014. LightSquared’s amended complaint seeks damages based on claims of promissory estoppel, quantum meruit, breach of contract, breach of implied covenant of good faith, unjust enrichment, negligent misrepresentation, constructive fraud, 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 to withdraw the reference.
The defendants filed joint motions to dismiss all counts of both the Harbinger and LightSquared Lawsuits on May 29, 2014. On February 5, 2015 the District Court issued an order dismissing with prejudice all counts of the Harbinger Lawsuit and all counts of the LightSquared Lawsuit except for the claims alleging negligent misrepresentation and constructive fraud. Harbinger has filed an appeal with the U.S. Court of Appeals for the Second Circuit against the dismissal of the Harbinger Lawsuit. In the LightSquared Lawsuit, Garmin has requested permission to file a dispositive motion, which the District Court is expected to consider at a status conference scheduled for September 2, 2015. 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 the Harbinger and LightSquared Lawsuits are without merit and intends to vigorously defend these actions.
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. A claim construction hearing was held by the court on October 23, 2013 and the parties await the court’s claim construction order. 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 Matter of Certain Marine Sonar Imaging Systems, Products Containing the Same and Components Thereof
On July 18, 2014, Johnson Outdoors Inc. and Johnson Outdoors Marine Electronics Inc. filed a complaint with the United States International Trade Commission (“ITC”) against Garmin International, Inc., Garmin North America, Inc., Garmin USA, Inc. and Garmin Corporation (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin of U.S. Patents 7,652,952 (“the ’952 patent”); 7,710,825 (“the ’825 patent”); and 7,755,974 (“the ’974 patent”). On August 15, 2014 the ITC instituted an investigation pursuant to the complaint. Garmin believes that each asserted claim of the ‘952 patent, the ‘825 patent, and the ‘974 patent is invalid and/or not infringed and, in addition, that the ’952, ’825, and ’974 patents are unenforceable under the doctrine of inequitable conduct and that Johnson Outdoors’ claims are barred in whole or in part by the doctrines of prosecution history estoppel and/or prosecution disclaimer. A trial hearing before the Administrative Law Judge (“ALJ”) was held on April 7 through April 10, 2015. On July 13, 2015 the ALJ issued an Initial Determination finding that the ’952, ’825, and ’974 patents are valid and enforceable but that there is no infringement by Garmin of any of the asserted claims of the ’952 and ’825 patents and that there is no infringement by Garmin of claim 25 of the ’974 patent. The ALJ found that there is infringement by Garmin of claims 14, 18, 21, 22, 23 and 33 of the ’974 patent. This initial determination is subject to review by the ITC and the final decision will be contained in a final determination issued by the ITC. Garmin disagrees with the ALJ’s finding of infringement of the ‘974 patent and will seek review by the ITC of this finding. 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 investigation are without merit and intends to vigorously defend the investigation.
In the Matter of Certain Marine Sonar Imaging Devices, Including Downscan and Sidescan Devices, Products Containing the Same , and Components Thereof
On June 9, 2014 Navico Inc. and Navico Holding AS filed a complaint with the United States International Trade Commission (“ITC”) against Garmin International, Inc., Garmin North America, Inc., Garmin USA, Inc. and Garmin (Asia) Corporation (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin of U.S. Patents 8,300,499 (“the ’499 patent”); 8,305,840 (“the ’840 patent”); and 8,605,550 (“the ’550 patent”). On July 9, 2014 the ITC instituted an investigation pursuant to the complaint. Garmin believes that each asserted claim of the ‘499 patent, the ‘840 patent, and the ‘550 patent is invalid and/or not infringed. A trial hearing before the Administrative Law Judge was held on March 18 through March 24, 2015. The Administrative Law Judge issued his initial determination on July 2, 2015 finding that the ‘840, ‘499 and ‘550 patents are valid but that there is no infringement by Garmin of the ‘840 patent, the ‘499 patent or the ‘550 patent. This initial determination is subject to review by the ITC and the final decision will be contained in a final determination issued 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 investigation are without merit and intends to vigorously defend the investigation
Johnson Outdoors Inc. and Johnson Outdoors Marine Electronics, Inc. v. Garmin International, Inc., Garmin North America, Inc. and Garmin USA, Inc.
On July 17, 2014, Johnson Outdoors Inc and Johnson Outdoors Marine Electronics Inc. filed suit in the United States District Court for the Middle District of Alabama, Northern Division, against Garmin International, Inc., Garmin North America, Inc. and Garmin USA, Inc. (collectively, “Garmin “) alleging infringement of U.S. Patents 7,652,952 (“the ’952 patent”); 7,710,825 (“the ’825 patent”); and 7,755,974 (“the ’974 patent”). On August 15, 2014, Garmin filed an answer. On October 17, 2014, Garmin filed an amended answer. In its amended answer Garmin asserts that each asserted claim of the ‘952 patent, the ‘825 patent and the ‘974 patent is invalid and/or not infringed and, in addition, that the ’952, ’825, and ’974 patents are unenforceable under the doctrine of inequitable conduct, and that Johnson Outdoors’ claims are barred in whole or in part by the doctrines of prosecution history estoppel and/or prosecution disclaimer and Garmin seeks treble damages against Johnson Outdoors for antitrust violations under Section 2 of the Sherman Act, 15 U.S.C. § 2. Garmin intends to vigorously defend this action. On May 12, 2015, pursuant to an agreement between the parties, the court entered an order staying this lawsuit until there is a final decision in the ITC investigation described above under In the Matter of Certain Marine Sonar Imaging Systems, Products Containing the Same and Components Thereof including any Federal Circuit appeals but not including any Supreme Court petitions or appeals. 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 with the same claims for relief as the earlier action and adding an additional claim for unjust enrichment. On February 4, 2014, the court ordered the case to be transferred to the United States District Court for the District of Utah. The plaintiff voluntarily dismissed the case filed in Illinois and, on March 6, 2014, she refiled the lawsuit in the District Court for the District of Utah with the same claims, but with additional claims for violations of the Utah Consumers Sales Practice Act, Lanham Act, and Utah Truth in Advertising Act. The relief she requested is the same. On March 31, 2014, Garmin filed a motion to transfer the venue of the Utah action back to the Northern District of Illinois. On October 21, 2014, the United States District Court for the District of Utah denied Garmin’s motion to transfer venue. On December 26, 2014, Garmin filed a motion to dismiss certain counts of the complaint. On April 16, 2015, the court granted Garmin’s motion in part and dismissed with prejudice (1) Mr. Katz’s (but not Mrs. Katz’s) claim for breach of the implied warranty of merchantability, (2) the plaintiffs’ Lanham Act claim, (3) the plaintiffs’ negligence claim and (4) the plaintiffs’ negligent misrepresentation claim. 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. On March 17, 2015, the plaintiff filed a motion for leave to file a second amended complaint. On April 7, 2015, Garmin filed an opposition to plaintiff’s motion for leave to file a second amended complaint. On April 28, 2015 the court granted plaintiff’s motion for leave to file a second amended complaint. On May 11, 2015 the plaintiff filed a motion for class certification. On July 10, 2015 Garmin filed its opposition to the motion for class certification. No class has been certified at this time, and Garmin believes that its defenses to Plaintiff’s motion for class certification are meritorious and that no class will be certified. 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.
Navico Inc. and Navico Holding AS v. Garmin International, Inc .and Garmin USA, Inc.
On June 4, 2014 Navico Inc. and Navico Holding AS filed suit in the United States District Court for the Northern District of Oklahoma against Garmin International, Inc. and Garmin USA, Inc. alleging infringement of U.S. Patents 8,300,499 (“the ’499 patent”); 8,305,840 (“the ’840 patent”); and 8,605,550 (“the ’550 patent”). On October 21, 2014, Garmin filed its answer asserting that each asserted claim of the ‘499, ‘840, and ‘550 patents 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 lawsuit.
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. On March 21, 2014, Garmin filed a motion for partial summary judgment. On July 24, 2014, the court denied the motion for partial summary judgment. On March 6, 2014, Garmin filed a request for ex parte reexamination of certain claims of the ‘992 patent. On May 5, 2014, Garmin filed a request for ex parte reexamination of certain claims of the ‘812 patent. On February 6, 2015, the U.S. Patent Office issued a final rejection for the identified claims of the ‘992 patent. On September 24, 2014, the U.S. Patent Office issued a non-final rejection of the identified claims of the ‘812 patent. On January 29, 2015, the U.S. Patent Office issued a second non-final rejection of the identified claims of the ‘812 patent. This lawsuit was tried before a jury in a trial commencing on May 11, 2015. On May 28, 2015 the jury issued a verdict finding that all of the asserted claims of the patents-in-suit are invalid. The jury also found that the asserted claims of the ‘992 and ’812 patents were not infringed by Garmin’s accused products but that the asserted claims of the ‘039 and ‘455 patents were infringed by Garmin’s accused products. On May 29, 2015 the court entered judgment in favor of Garmin. On July 8, 2015 the curt entered a stipulation regarding post-trial matters in which Silver State agreed not to pursue any appeal or post-trial motions in consideration for Garmin withdrawing its Bill of Costs against Silver State.
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. Such Investigation was terminated with a finding of no violation by Garmin. On March 21, 2012, Technology Properties Limited LLC filed a petition for reorganization under Chapter 11 of the federal bankruptcy laws. On September 24, 2014, the court related the Garmin case with other cases brought by TPL, effectively lifting the stay. On December 18, 2014, Garmin filed its answer asserting that each asserted claim of the ‘336, ‘749, and ‘890 patents 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 action are without merit and intends to vigorously defend this action.
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. On May 23, 2014 the special master held a hearing on the summary judgment motions. Prior to the hearing Visteon dropped its claim that Garmin infringes the ‘316 patent. On September 17, 2014, the special master issued a report recommending that Garmin’s motion for summary judgment of non-infringement of the ‘375 patent be granted, Visteon’s motion for summary judgment of validity under section 112 of the ‘375 and ‘060 patents be granted, and that all other motions for summary judgment be denied. On March 18, 2015, the court issued an order granting Garmin’s motion for summary judgment of non-infringement of the ‘375 patent, denying Visteon’s motion for summary judgment as to the ‘408 patent, rejecting the Special Master’s recommendation to grant Visteon’s motion for summary judgment as to the Garmin’s Section 112 defenses and denying Visteon’s motion for summary judgment as to Garmin’s Section 112 defenses, denying Garmin’s motion for summary judgment as to the ‘892 patent and dismissing as withdrawn Visteon’s claim of infringement of the ‘316 patent, On November 21, 2014, Garmin filed a second request for ex parte reexamination of the ‘408 patent. On March 23, 2015, the U.S. Patent Office issued a non-final office action finding the challenged claims of the ‘408 patent to be invalid and/or obvious in view of the prior art. 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 1A. Risk Factors
There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 27, 2014. There have been no material changes during the 13-week period ended June 27, 2015 in the risks described in our Annual Report on Form 10-K. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items (a) and (b) are not applicable.
(c) Issuer Purchases of Equity Securities
The Board of Directors approved a share repurchase program on February 13, 2015, authorizing the Company to purchase up to $300 million of its common shares as market and business conditions warrant. The share repurchase authorization expires on December 31, 2016. The following table lists the Company’s share purchases during the second quarter of fiscal 2015:
None
Not applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: July 29, 2015
INDEX TO EXHIBITS