GARMIN LTD (GRMN) Form 10-K for Period Ending 12/31/2011
Xcelerate Version: 6.13.8
 
Document and Entity Information (USD $)
Dec. 31, 2011
Feb. 23, 2012
Jun. 25, 2011
Document Information [Line Items]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Dec. 31, 2011 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
GRMN 
 
 
Entity Registrant Name
GARMIN LTD 
 
 
Entity Central Index Key
0001121788 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
208,077,418 
 
Entity Public Float
 
 
$ 3,996,788,770 
Consolidated Balance Sheets (USD $)
Dec. 31, 2011
Dec. 25, 2010
Current assets:
 
 
Cash and cash equivalents
$ 1,287,160,000 
$ 1,260,936,000 
Marketable securities (Note 3)
111,153,000 
24,418,000 
Accounts receivable, less allowance for doubtful accounts of $30,224 in 2011 and $31,822 in 2010
607,450,000 
747,249,000 
Inventories, net
397,741,000 
387,577,000 
Deferred income taxes (Note 6)
42,957,000 
33,628,000 
Deferred costs
40,033,000 
20,053,000 
Prepaid expenses and other current assets
69,790,000 
24,894,000 
Total current assets
2,556,284,000 
2,498,755,000 
Property and equipment, net
 
 
Land and improvements
95,570,000 
94,792,000 
Building and improvements
277,624,000 
274,163,000 
Office furniture and equipment
112,345,000 
98,779,000 
Vehicles
19,001,000 
18,437,000 
Property, Plant and Equipment, Gross
711,368,000 
677,709,000 
Accumulated depreciation
(294,263,000)
(249,904,000)
Long lived assets
417,105,000 
427,805,000 
Restricted cash (Note 4)
771,000 
1,277,000 
Marketable securities (Note 3)
1,097,002,000 
777,401,000 
License agreements, net
5,517,000 
1,800,000 
Noncurrent deferred income tax (Note 6)
107,190,000 
73,613,000 
Noncurrent deferred costs
40,823,000 
24,685,000 
Other intangible assets
246,646,000 
183,352,000 
Total assets
4,471,338,000 
3,988,688,000 
Current liabilities:
 
 
Accounts payable
164,010,000 
132,348,000 
Salaries and benefits payable
45,964,000 
49,288,000 
Accrued warranty costs
46,773,000 
49,885,000 
Accrued sales program costs
52,262,000 
107,261,000 
Deferred revenue
188,987,000 
89,711,000 
Accrued royalty costs
99,025,000 
95,086,000 
Accrued advertising expense
31,915,000 
21,587,000 
Other accrued expenses
67,912,000 
63,043,000 
Deferred income taxes (Note 6)
5,782,000 
4,800,000 
Income taxes payable
77,784,000 
56,028,000 
Dividend payable
77,865,000 
 
Total current liabilities
858,279,000 
669,037,000 
Deferred income taxes (Note 6)
4,951,000 
6,986,000 
Non-current income taxes
161,904,000 
153,621,000 
Non-current deferred revenue
188,132,000 
108,076,000 
Other liabilities
1,491,000 
1,406,000 
Stockholders' equity:
 
 
Shares, CHF 10 par value, 208,077,418 shares authorized and issued; 194,662,617 shares outstanding at December 31, 2011; and 194,358,038 shares outstanding at December 25, 2010; (Notes 9, 10, 11, and 12):
1,797,435,000 
1,797,435,000 
Additional paid-in capital
61,869,000 
38,268,000 
Treasury stock
(103,498,000)
(106,758,000)
Retained earnings
1,413,582,000 
1,264,613,000 
Accumulated other comprehensive gain/(loss)
87,193,000 
56,004,000 
Total stockholders' equity
3,256,581,000 
3,049,562,000 
Total liabilities and stockholders' equity
4,471,338,000 
3,988,688,000 
Manufacturing
 
 
Property and equipment, net
 
 
Equipment
125,820,000 
119,829,000 
Engineering
 
 
Property and equipment, net
 
 
Equipment
$ 81,008,000 
$ 71,709,000 
Consolidated Balance Sheets (Parenthetical)(USD ($))
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2011
Dec. 25, 2010
Accounts receivable, allowance for doubtful accounts
$ 30,224 
$ 31,822 
Shares, par value
$ 9.0744 
$ 9.0744 
Shares authorized
208,077,418 
208,077,418 
Shares issued
208,077,418 1
208,077,418 1 2 3
Shares outstanding
194,662,617 
194,358,038 
Consolidated Statements of Income (USD $)
12 Months Ended
In Thousands, except Per Share data, unless otherwise specified
Dec. 31, 2011
Dec. 25, 2010
Dec. 26, 2009
Net sales
$ 2,758,569 
$ 2,689,911 
$ 2,946,440 
Cost of goods sold
1,419,977 
1,343,537 
1,502,329 
Gross profit
1,338,592 
1,346,374 
1,444,111 
Advertising expense
145,024 
144,613 
155,521 
Selling, general and administrative expenses
341,217 
287,824 
264,202 
Research and development expense
298,584 
277,261 
238,378 
Operating Expenses, Total
784,825 
709,698 
658,101 
Operating income
553,767 
636,676 
786,010 
Other income (expense):
 
 
 
Interest income
32,812 
24,979 
23,519 
Interest expense
 
(1,246)
 
Foreign currency
(12,100)
(88,377)
(6,040)
Other
9,682 
5,240 
5,162 
Nonoperating Income (Expense), Total
30,394 
(59,404)
22,641 
Income before income taxes
584,161 
577,272 
808,651 
Income tax provision (benefit): (Note 6)
 
 
 
Current
110,755 
(11,636)
128,036 
Deferred
(47,490)
4,305 
(23,335)
Income tax expense
63,265 
(7,331)
104,701 
Net income
$ 520,896 
$ 584,603 
$ 703,950 
Basic net income per share (Note 10)
$ 2.68 
$ 2.97 
$ 3.51 
Diluted net income per share (Note 10)
$ 2.67 
$ 2.95 
$ 3.50 
Consolidated Statements of Stockholders' Equity (USD $)
Total
Common Stock
Additional Paid-In Capital
Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Gain/(Loss)
Beginning Balance at Dec. 27, 2008
$ 2,225,854,000 
$ 1,002,000 
$ 0 
$ 0 
$ 2,262,503,000 
$ (37,651,000)
Net income
703,950,000 
 
 
 
703,950,000 
 
Translation adjustment
24,537,000 
 
 
 
 
24,537,000 
Adjustment related to unrealized gains (losses) on available-for-sale securities, net of income tax effects of ($369) in 2011, $348 in 2010 and $676 in 2009
(268,000)
 
 
 
 
(268,000)
Comprehensive income
728,219,000 
 
 
 
 
 
Dividends paid
(149,846,000)
 
 
 
(149,846,000)
 
Tax benefit from exercise of employee stock options
1,366,000 
 
1,366,000 
 
 
 
Issuance of common stock from exercise of stock options
3,784,000 
3,000 
3,781,000 
 
 
 
Stock compensation
43,616,000 
 
43,616,000 
 
 
 
Purchase and retirement of common stock (prior to June 27, 2010 in 2010)
(20,258,000)
(4,000)
(20,254,000)
 
 
 
Issuance of common stock through stock purchase plan
3,712,000 
 
3,712,000 
 
 
 
Ending Balance at Dec. 26, 2009
2,836,447,000 
1,001,000 
32,221,000 
2,816,607,000 
(13,382,000)
Net income
584,603,000 
 
 
 
584,603,000 
 
Translation adjustment
52,509,000 
 
 
 
 
52,509,000 
Adjustment related to unrealized gains (losses) on available-for-sale securities, net of income tax effects of ($369) in 2011, $348 in 2010 and $676 in 2009
16,877,000 
 
 
 
 
16,877,000 
Comprehensive income
653,989,000 
 
 
 
 
 
Dividends paid
(298,853,000)
 
 
 
(298,853,000)
 
Tax benefit from exercise of employee stock options
4,495,000 
 
4,495,000 
 
 
 
Issuance of common stock from exercise of stock options
9,465,000 
2,000 
(867,000)
10,330,000 
 
 
Stock compensation
40,332,000 
 
40,332,000 
 
 
 
Purchase and retirement of common stock (prior to June 27, 2010 in 2010)
(108,840,000)
(16,000)
(67,528,000)
 
(41,296,000)
 
Purchase and retirement of treasury stock
(117,088,000)
 
 
(117,088,000)
 
 
Impact of redomestication on par value of common shares
 
1,796,448,000 
 
 
(1,796,448,000)
 
Deferred tax impact of redomestication
29,615,000 
 
29,615,000 
 
 
 
Ending Balance at Dec. 25, 2010
3,049,562,000 
1,797,435,000 
38,268,000 
(106,758,000)
1,264,613,000 
56,004,000 
Net income
520,896,000 
 
 
 
520,896,000 
 
Translation adjustment
14,716,000 
 
 
 
 
14,716,000 
Adjustment related to unrealized gains (losses) on available-for-sale securities, net of income tax effects of ($369) in 2011, $348 in 2010 and $676 in 2009
16,473,000 
 
 
 
 
16,473,000 
Comprehensive income
552,085,000 
 
 
 
 
 
Dividends paid
(388,628,000)
 
 
 
(388,628,000)
 
Tax benefit from exercise of employee stock options
3,313,000 
 
3,313,000 
 
 
 
Issuance of treasury stock related to equity awards
22,337,000 
 
(19,924,000)
42,261,000 
 
 
Stock compensation
40,212,000 
 
40,212,000 
 
 
 
Purchase of treasury stock
(22,300,000)
 
 
(22,300,000)
 
 
Reclassification of retired shares to treasury shares
 
 
 
(16,701,000)
16,701,000 
 
Ending Balance at Dec. 31, 2011
$ 3,256,581,000 
$ 1,797,435,000 
$ 61,869,000 
$ (103,498,000)
$ 1,413,582,000 
$ 87,193,000 
Consolidated Statements of Stockholders' Equity (Parenthetical) (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 25, 2010
Dec. 26, 2009
Adjustment related to unrealized gains (losses) on available-for-sale securities, income tax
$ (369)
$ 348 
$ 676 
Consolidated Statements of Cash Flows (USD $)
12 Months Ended
In Thousands, unless otherwise specified
Dec. 31, 2011
Dec. 25, 2010
Dec. 26, 2009
Operating Activities:
 
 
 
Net income
$ 520,896 
$ 584,603 
$ 703,950 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
54,610 
53,487 
56,695 
Amortization
39,925 
41,164 
39,791 
Gain on sale of property and equipment
(2,192)
(306)
(14)
Provision for doubtful accounts
2,317 
(4,476)
(1,332)
Provision for obsolete and slow-moving inventories
16,047 
5,753 
61,323 
Unrealized foreign currency losses
18,583 
62,770 
7,480 
Deferred income taxes
(42,475)
(471)
(25,096)
Stock compensation
40,212 
40,332 
43,616 
Realized loss/(gains) on marketable securities
(4,322)
2,382 
(2,741)
Changes in operating assets and liabilities, net of acquisitions:
 
 
 
Accounts receivable
169,543 
129,698 
(131,978)
Inventories
(6,385)
(77,122)
61,189 
Prepaid expenses and other current assets
(51,423)
9,886 
8,054 
License fees
(9,573)
(3,329)
(13,735)
Accounts payable
(26,329)
(81,354)
38,875 
Other current and non-current liabilities
(61,103)
(144,476)
172,215 
Deferred revenue
179,439 
131,303 
65,706 
Deferred costs
(36,120)
(31,445)
(5,314)
Income taxes payable
20,684 
52,238 
15,772 
Net cash provided by operating activities
822,334 
770,637 
1,094,456 
Investing activities:
 
 
 
Purchases of property and equipment
(38,366)
(32,232)
(49,199)
Proceeds from sale of property and equipment
4,127 
139 
Purchase of intangible assets
(6,933)
(3,883)
(7,573)
Purchase of marketable securities
(1,172,555)
(694,038)
(776,966)
Redemption of marketable securities
779,213 
668,495 
285,970 
Acquisitions, net of cash acquired
(54,190)
(12,120)
 
Change in restricted cash
506 
770 
(106)
Net cash used in investing activities
(488,198)
(72,869)
(547,869)
Financing activities:
 
 
 
Dividends
(310,763)
(298,853)
(149,846)
Proceeds from issuance of common stock through stock purchase plan
 
 
3,712 
Issuance of treasury/common stock related to equity awards
22,337 
9,465 
3,783 
Tax benefit from issuance of equity awards
3,313 
4,495 
1,366 
Purchase of treasury/common stock
(22,300)
(225,928)
(20,258)
Net cash used in financing activities
(307,413)
(510,821)
(161,243)
Effect of exchange rate changes on cash and cash equivalents
(499)
(17,592)
9,902 
Net increase in cash and cash equivalents
26,224 
169,355 
395,246 
Cash and cash equivalents at beginning of year
1,260,936 
1,091,581 
696,335 
Cash and cash equivalents at end of year
1,287,160 
1,260,936 
1,091,581 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the year for income taxes
85,231 
43,940 
69,186 
Cash received during the year from income tax refunds
350 
4,526 
2,934 
Cash paid during the year for interest
 
1,246 
 
Supplemental disclosure of non-cash investing and financing activities
 
 
 
Change in marketable securities related to unrealized appreciation (depreciation)
16,104 
17,225 
408 
Fair value of assets acquired
162,572 
21,918 
 
Liabilities assumed
(93,014)
(5,547)
 
Less: cash acquired
(15,368)
(4,251)
 
Net cash paid
$ 54,190 
$ 12,120 
 
Description of the Business
Dec. 31, 2011
Description of the Business

1. Description of the Business

  

Garmin Ltd. and subsidiaries (together, the “Company”) manufacture, market, and distribute Global Positioning System-enabled products and other related products. Garmin Corporation (GC), wholly-owned by Garmin Ltd., is primarily responsible for the manufacturing and distribution of the Company’s products to Garmin International, Inc. (GII), a wholly-owned subsidiary of GC, and Garmin (Europe) Limited (GEL), a wholly-owned subsidiary of Garmin Ltd., and, to a lesser extent, new product development and sales and marketing of the Company’s products in Asia and the Far East. GII is primarily responsible for sales and marketing of the Company’s products in many international markets and in the United States as well as research and new product development. GII also manufactures certain products for the Company’s aviation segment. GEL is responsible for sales and marketing of the Company’s products, principally within the European market.

Summary of Significant Accounting Policies
Dec. 31, 2011
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The accompanying consolidated financial statements reflect the accounts of Garmin Ltd. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

 

Fiscal Year

 

The Company has adopted a 52–53-week period ending on the last Saturday of the calendar year. Due to the fact that there are not exactly 52 weeks in a calendar year and there is slightly more than one additional day per year (not including the effects of leap year) in each calendar year as compared to a 52-week fiscal year, the Company will have a fiscal year comprising 53 weeks in certain fiscal years, as determined by when the last Saturday of the calendar year occurs.

 

In those resulting fiscal years that have 53 weeks, the Company will record an extra week of sales, costs, and related financial activity. Therefore, the financial results of those fiscal years, and the associated 14-week fourth quarter, will not be entirely comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. Fiscal 2010 and 2009 included 52 weeks while fiscal 2011 included 53 weeks.

 

Foreign Currency

 

Many Garmin Ltd. subsidiaries utilize currencies other than the United States Dollar (USD) as their functional currency. As required by the Foreign Currency Matters topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the financial statements of these subsidiaries for all periods presented have been translated into USD, the functional currency of Garmin Ltd., and the reporting currency herein, for purposes of consolidation at rates prevailing during the year for sales, costs, and expenses and at end-of-year rates for all assets and liabilities. The effect of this translation is recorded in a separate component of stockholders’ equity. Cumulative translation adjustments of $76,456 and $61,740 as of December 31, 2011 and December 25, 2010, respectively, have been included in accumulated other comprehensive gain/(loss) in the accompanying consolidated balance sheets.

 

 

Transactions in foreign currencies are recorded at the approximate rate of exchange at the transaction date. Assets and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date. All differences are recorded in results of operations and amounted to exchange losses of $12,100, $88,377, and $6,040 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. The loss in fiscal 2011 was primarily the result of the slight strengthening of the USD against the Euro and the slight weakening of the USD against the Taiwan Dollar. The loss in fiscal 2010 was primarily the result of the strengthening of the USD against the Euro and the British Pound Sterling and the weakening of the USD against the Taiwan Dollar. The loss in fiscal 2009 was primarily the result of the weakening of the USD against the Taiwan Dollar offset by the weakening of the USD against the Euro and the British Pound Sterling.

 

Earnings Per Share

 

Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. For purposes of diluted earnings per share, the number of shares that would be issued from the exercise of dilutive stock options has been reduced by the number of shares which could have been purchased from the proceeds of the exercise at the average market price of the Company’s stock during the period the options were outstanding. See Note 10.

  

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, operating accounts, money market funds, and securities with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents approximates fair value, given the short maturity of those instruments.

 

Trade Accounts Receivable

 

The Company sells its products to retailers, wholesalers, and other customers and extends credit based on its evaluation of the customer’s financial condition.  Potential losses on receivables are dependent on each individual customer’s financial condition. The Company carries its trade accounts receivable at net realizable value. Typically, its accounts receivable are collected within 80 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables and (2) reviewing its high-risk customers. Past due receivable balances are written off when its internal collection efforts have been unsuccessful in collecting the amount due. In 2011, Garmin purchased credit insurance to provide security against large losses.

 

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method (which approximates the first-in, first-out (FIFO) method) by GC and the FIFO method by GII and GEL. Inventories consisted of the following:

 

    December 31, 2011     December 25, 2010  
             
Raw Materials   $ 129,211     $ 103,277  
Work-in-process     52,176       43,507  
Finished goods     245,724       278,513  
Inventory Reserves     (29,370 )     (37,720 )
Inventory, net of reserves   $ 397,741     $ 387,577  

 

 

Property and Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:

 

Buildings and improvements 39
Office furniture and equipment 3-5
Manufacturing and engineering equipment 5
Vehicles 5

 

Long-Lived Assets

 

As required by the Property, Plant and Equipment topic of the FASB ASC, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

 

The Intangibles – Goodwill and Other topic of the FASB ASC requires that goodwill and intangible assets with indefinite useful lives should not be amortized but rather be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company did not recognize any goodwill or intangible asset impairment charges in 2011, 2010, or 2009. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit.  The accounting guidance also requires that intangible assets with finite lives be amortized over their estimated useful lives and reviewed for impairment. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from 3 to 10 years.

  

Dividends

  

On June 27, 2010, the Company completed the redomestication of the place of our incorporation from the Cayman Islands to Switzerland. Under Swiss corporate law, dividends must be approved by shareholders at the general meeting of our shareholders.

 

On June 3, 2011, the shareholders approved a dividend of $2.00 per share (of which, $1.60 was paid in the Company's 2011 fiscal year) payable in four installments as follows: $0.80 on June 30, 2011 to shareholders of record on June 15, 2011, $0.40 on September 30, 2011 to shareholders of record on September 15, 2011, $0.40 on December 30, 2011 to shareholders of record on December 15, 2011 and $0.40 on March 30, 2012 to shareholders of record on March 15, 2012. The Company paid dividends in 2011 in the amount of $310,763. Both the dividend paid and the remaining dividend payable have been reported as a reduction of retained earnings.

 

On March 16, 2010 the Board of Directors declared a dividend of $1.50 per share to be paid on April 30, 2010 to shareholders of record on April 15, 2010. The Company paid out a dividend in the amount of $298,853. The dividend was reported as a reduction of retained earnings.

 

On July 30, 2009 the Board of Directors declared a dividend of $0.75 per share to be paid on December 15, 2009 to shareholders of record on December 1, 2009. The Company paid out a dividend in the amount of $149,846. The dividend was reported as a reduction of retained earnings.

 

Approximately $239,470 and $213,486 of retained earnings are indefinitely restricted from distribution to stockholders pursuant to the laws of Taiwan at December 31, 2011 and December 25, 2010, respectively.

 

 

Intangible Assets

 

At December 31, 2011 and December 25, 2010, the Company had patents, license agreements, customer related intangibles and other identifiable finite-lived intangible assets recorded at a cost of $206,872 and $152,138, respectively. The Company’s excess purchase cost over fair value of net assets acquired (goodwill) was $179,475 at December 31, 2011 and $136,548 at December 25, 2010. The increase in identifiable intangible assets and goodwill in 2011 is principally related to the acquisitions completed by the Company, as further described in Note 15.

  

    December 31,
2011
    December 25,
2010
 
Goodwill balance at beginning of year   $ 136,548     $ 129,066  
Acquisitions     46,481       11,649  
Finalization of purchase price allocations and effect of foreign currency translation     (3,554 )     (4,167 )
Goodwill balance at end of year   $ 179,475     $ 136,548  

 

Identifiable, finite-lived intangible assets are amortized over their estimated useful lives on a straight-line basis over three to ten years. Accumulated amortization was $134,184 and $103,534 at December 31, 2011 and December 25, 2010 respectively. Amortization expense was $33,225, $36,675, and $37,444 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. In the next five years, the amortization expense is estimated to be $28,464, $14,413, $9,518, $6,978, and $5,301, respectively.

 

Marketable Securities

 

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.

 

All of the Company’s marketable securities were considered available-for-sale at December 31, 2011. See Note 3. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive gain/(loss). At December 31, 2011 and December 25, 2010, cumulative unrealized gains/(losses) of $10,737 and ($5,736), respectively, were reported in accumulated other comprehensive gain/(loss), net of related taxes.

 

The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in other income. The cost of securities sold is based on the specific identification method.

 

Income Taxes

 

The Company accounts for income taxes using the liability method in accordance with the FASB ASC topic Income Taxes. The liability method provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes as measured based on the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income taxes of $252,793, $233,028, and $171,097 at December 31, 2011, December 25, 2010, and December 26, 2009, respectively, have not been accrued by the Company for the unremitted earnings of several of its foreign subsidiaries because such earnings are intended to be reinvested in the subsidiaries indefinitely.

 

The Company adopted the applicable guidance included in the FASB ASC topic Income Taxes related to accounting for uncertainty in income taxes on December 31, 2006, the beginning of fiscal year 2007.   The total amount of unrecognized tax benefits as of December 31, 2011 was $161,904 including interest of $10,850.  A reconciliation of the beginning and ending amount of unrecognized tax benefits for years ending December 31, 2011, December 25, 2010, and December 26, 2009 is as follows:

  

 

    December 31,     December 25,     December 26,  
    2011     2010     2009  
Balance at beginning of year   $ 153,621     $ 255,748     $ 214,366  
Additions based on tax positions related to prior years     5,568       11,443       14,241  
Reductions based on tax positions related to prior years     (6,885 )     (10,392 )     (16,141 )
Additions based on tax positions related to current period     29,210       43,202       63,053  
Reductions based on tax positions related to current period     -       -       -  
Reductions related to settlements with tax authorities     -       (122,314 )     -  
Expiration of statute of limitations     (19,610 )     (24,066 )     (19,771 )
Balance at end of year   $ 161,904     $ 153,621     $ 255,748  

 

The December 31, 2011 balance of $161,904 of unrecognized tax benefits, if recognized, would reduce the effective tax rate.  None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility. 

 

Accounting guidance requires unrecognized tax benefits to be classified as non-current liabilities, except for the portion that is expected to be paid within one year of the balance sheet date.  The entire $161,904, $153,621, and $255,748 are required to be classified as non-current at December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

 

Interest expense and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense.  At December 31, 2011, December 25, 2010, and December 26, 2009, the Company had accrued approximately $10,850, $9,580, and $20,160, respectively, for interest.  Interest expense (income) included in income tax expense for the years ending December 31, 2011, December 25, 2010, and December 26, 2009 is $5,568, ($10,580), and $9,000, respectively. The Company had no amounts accrued for penalties as the nature of the unrecognized tax benefits, if recognized, would not warrant the imposition of penalties.

 

The Company files income tax returns in Switzerland and U.S. federal jurisdictions, as well as various state, local and foreign jurisdictions.  The Company is no longer subject to U.S. federal, state, or local tax examinations by tax authorities for years prior to 2008.  The Company is no longer subject to Taiwan income tax examinations by tax authorities for years prior to 2006.  The Company is no longer subject to United Kingdom tax examinations by tax authorities for years prior to 2009.

  

The Company also considers 2008 U.S. federal returns to have been effectively settled due to completion of an audit examination by the Internal Revenue Service.  A reduction of income tax expense was recognized to reflect this settlement. In addition, the Company recognized a reduction of income tax expense of $19,610, $24,066, and $19,771 in fiscal years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively, to reflect the expiration of statutes of limitations in various jurisdictions.

 

The Company believes that it is reasonably possible that approximately $20,482 of its reserves for certain unrecognized tax benefits will decrease within the next 12 months as the result of the expiration of statutes of limitations. This potential decrease in unrecognized tax benefits would impact the Company’s effective tax rate within the next 12 months.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

  

Concentration of Credit Risk

 

The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and typically have been within management’s expectations. Certain customers are allowed extended terms consistent with normal industry practice. Most of these extended terms can be classified as either relating to seasonal sales variations or to the timing of new product releases by the Company.

 

 

The Company’s top ten customers have contributed between 29% and 36% of net sales since 2009. In 2011, the Company purchased trade credit insurance to provide security against large losses. Best Buy, a customer in the outdoor, fitness, marine and auto/mobile segments accounted for less than 10% of the Company’s consolidated net sales in the years ended December 31, 2011, and December 25, 2010, respectively, while accounting for 13.4% of the Company’s consolidated net sales in the year ended December 26, 2009.

 

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 that is 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 that involve multiple-element arrangements that are immaterial.

 

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 two deliverables contained in arrangements involving the sale of PNDs which include either the LMU 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 deliverable is either the LMU or premium traffic service. The Company has allocated revenue between these two 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 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, the Company 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 have 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 has 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 of the 2011 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.

 

In 2009 and 2010 respectively, Garmin introduced the nüvi 1690 and 1695, premium PNDs with a built-in wireless module that lets customers access Garmin’s nüLink!™ service, which provides direct links to certain online information.  Additional models were introduced in 2011. The Company has identified two deliverables contained in arrangements involving the sale of the nüvi products with the nüLink feature. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale, and the second deliverable is the nüLink service. The Company has allocated revenue between these two deliverables using the relative selling price method determined using VSOE. 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 allocated to the nüLink services are deferred and recognized on a straight-line basis over the life of the service, which is either 12 or 24 months.

 

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, are 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.

 

 

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 the Company’s historical experience.

 

Deferred Revenues and Costs

  

At December 31, 2011 and December 25, 2010, the Company had deferred revenues totaling $377,119 and $197,787, respectively, and related deferred costs totaling $80,856 and $44,738, respectively.

 

The deferred revenues and costs are recognized over their estimated economic lives of two to three years on a straight-line basis. In the next three years, the gross margin recognition of deferred revenue and cost for the currently deferred amounts is estimated to be $148,954, $108,156, and $39,153, respectively.

 

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold in the accompanying consolidated financial statements.

 

Product Warranty

  

The Company provides for estimated warranty costs at the time of sale. The warranty period for most products is one year to two years from date of shipment while certain aviation products have a warranty period of two years from the date of installation and certain marine products have a warranty period of three years from the date of shipment.

 

Sales Programs

 

The Company provides certain monthly and quarterly incentives for its dealers and distributors based on various factors including dealer purchasing volume and growth. Additionally, from time to time, the Company provides rebates to end users on certain products. Estimated rebates and incentives payable to dealers and distributors are regularly reviewed and recorded as accrued expenses on a monthly basis. In addition, the Company provides dealers and distributors with product discounts to assist these customers in clearing older products from their inventories in advance of new product releases. Each discount is tied to a specific product and can be applied to all customers who have purchased the product or a special discount may be agreed to on an individual customer basis. These rebates, incentives, and discounts are recorded as reductions to net sales in the accompanying consolidated statements of income in the period the Company has sold the product.

 

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense amounted to approximately $145,024, $144,613, and $155,521 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

 

Research and Development

 

A majority of the Company’s research and development is performed in the United States. Research and development costs, which are expensed as incurred, amounted to approximately $298,584, $277,261, and $238,378 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

 

 

Customer Service and Technical Support

 

Customer service and technical support costs are included as selling, general and administrative expenses in the accompanying consolidated statements of income. Customer service and technical support costs include costs associated with performing order processing, answering customer inquiries by telephone and through Web sites, e-mail and other electronic means, and providing free technical support assistance to customers. The technical support is provided within one year after the associated revenue is recognized. The related cost of providing this free support is not material.

 

Software Development Costs

 

The FASB ASC topic entitled Software requires companies to expense software development costs as they incur them until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. Capitalized software development costs are not significant as the time elapsed from working model to release is typically short. As required by the Research and Development topic of the FASB ASC, costs incurred to enhance our existing products or after the general release of the service using the product are expensed in the period they are incurred and included in research and development costs in the accompanying consolidated statements of income.

 

Accounting for Stock-Based Compensation

 

The Company currently sponsors four stock based employee compensation plans. The FASB ASC topic entitled Compensation – Stock Compensation requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including employee stock options and restricted stock based on estimated fair values. See Note 9.

 

Accounting guidance requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as stock-based compensation expense on a straight-line basis over the requisite service period in the Company’s consolidated financial statements.

 

As stock-based compensation expenses recognized in the accompanying consolidated statements of income are based on awards ultimately expected to vest, they have been reduced for estimated forfeitures. Accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience and management’s estimates.

  

Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued an amendment to the accounting standards related to fair value measurements and disclosure requirements that result in a consistent definition of fair value and common requirements for the measurement and disclosure of fair value between U.S. GAAP and International Financial Reporting Standards. This standard provides certain amendments to the existing guidance on the use and application of fair value measurements and maintains a definition of fair value that is based on the notion of exit price. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. The Company is currently evaluating the impact of adopting this amendment, but it is not expected to have a material impact on the financial statements.

 

In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. The guidance allows two presentation alternatives; present items in net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The Company is currently evaluating which presentation alternative it will utilize.

 

 

 

In September 2011, the FASB issued an amendment to ASC 350, Intangibles—Goodwill and Other, which simplifies how entities test goodwill for impairment. Under the amendment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test for goodwill is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 of the ASC. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9 of the ASC. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company is currently evaluating the impact of adopting this amendment, but it is not expected to have a material impact on the financial statements.

Marketable Securities
Dec. 31, 2011
Marketable Securities

3. Marketable Securities

 

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:

 

Level 1 Unadjusted quoted prices in active markets for identical assets or liability
   
Level 2 Unadjusted quoted prices in active markets for similar assets or liabilities, or
  unadjusted quoted prices for identical or similar assets
   
Level 3 Unobservable inputs for the asset or liability

 

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.

 

For fair value measurements using significant unobservable inputs, an independent third party provided the valuation. The inputs used in the valuations were completed using the following methodology. The collateral composition was used to estimate Weighted Average Life based on historical and projected payment information. Cash flows were projected for the issuing trusts, taking into account underlying loan principal, bonds outstanding, and payout formulas. Taking this information into account, assumptions were made as to the yields likely to be required, based upon then current market conditions for comparable or similar term Asset Based Securities as well as other fixed income securities.

 

 

Assets and liabilities measured at estimated fair value on a recurring basis are summarized below:

 

    Fair Value Measurements as  
    of December 31, 2011  
                         
Description   Total     Level 1     Level 2     Level 3  
                                 
Available for-sale securities   $ 1,208,155     $ 1,208,155     $ -     $ -  
                                 
Total   $ 1,208,155     $ 1,208,155     $ -     $ -  

 

    Fair Value Measurements as  
    of December 25, 2010  
                         
Description   Total     Level 1     Level 2     Level 3  
                         
Available for-sale securities   $ 781,257     $ 781,257     $ -     $ -  
Failed auction rate securities     20,562       -       -       20,562  
                                 
Total   $ 801,819     $ 781,257     $ -     $ 20,562  

 

All Level 3 investments at December 25, 2010 had been in a continuous unrealized loss position for 12 months or longer. However, it was the Company’s intent to hold these securities until they recovered their value. The Company sold these securities during 2011 and realized an immaterial loss. For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, the accounting guidance requires a reconciliation of the beginning and ending balances, separately for each major category of assets. The reconciliation is as follows:

 

    Fair Value Measurements Using  
    Significant Unobservable Inputs (Level 3)  
    Year Ended     Year Ended  
    December 31, 2011     December 25, 2010  
             
Beginning balance of auction rate securities   $ 20,562     $ 70,252  
Total unrealized gains included in other comprehensive income     5,038       16,410  
Sales out of Level 3     (25,600 )     (66,100 )
Transfers in and/or out of Level 3     -       -  
Ending balance of auction rate securities   $ -     $ 20,562  

  

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

  

    Amortized Cost     Gross 
Unrealized Gains
    Gross
Unrealized
Losses
    Other Than
Temporary
Impairment
    Estimated Fair 
Value (Net Carrying
Amount)
 
Mortgage-backed securities   $ 626,776     $ 12,936     $ (1,086 )   $ -     $ 638,626  
Obligations of states and political subdivisions     358,314       2,339       (1,090 )     -       359,563  
U.S. corporate bonds     134,763       815       (2,260 )     (1,274 )     132,044  
Other     78,031       113       (222 )     -       77,922  
Total   $ 1,197,884     $ 16,203     $ (4,658 )   $ (1,274 )   $ 1,208,155  

 

 

The following is a summary of the company’s marketable securities classified as available-for-sale securities at December 25, 2010:

 

    Amortized Cost     Gross 
Unrealized Gains
    Gross
Unrealized
Losses
    Other Than
Temporary
Impairment
    Estimated Fair 
Value (Net Carrying
Amount)
 
Mortgage-backed securities   $ 527,249     $ 1,913     $ (1,519 )   $ -     $ 527,643  
Auction Rate Securities     25,599       -       (5,037 )     -       20,562  
Obligations of states and political subdivisions     160,618       347       (3,341 )     -       157,624  
U.S. corporate bonds     54,348       637       (185 )     (1,274 )     53,526  
Other     39,838       2,626       -       -       42,464  
Total   $ 807,652     $ 5,523     $ (10,082 )   $ (1,274 )   $ 801,819  

 

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

 

The unrealized losses and unrealized gains on the Company’s investments in 2010 and 2011, respectively, were caused primarily by changes in interest rates and credit spreads. 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 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. Therefore, the Company considers the declines to be temporary in nature. Fair values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value. During 2010 and 2011, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and estimated fair value of marketable securities at December 31, 2011, 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. Included in the $55,694 amount below is $34,590 that has been classified as current because the underlying securities were sold subsequent to year-end. The remaining amount of $21,104 has been classified as noncurrent.

 

          Estimated  
    Cost     Fair Value  
                 
Due in one year or less (2012)   $ 76,427     $ 76,563  
Due after one year through five years (2013-2017)     370,827       370,551  
Due after five years through ten years (2018-2022)     311,251       313,073  
Due after ten years (2023 and thereafter)     385,017       392,274  
Other (No contractual maturity dates)     54,362       55,694  
    $ 1,197,884     $ 1,208,155
Commitments and Contingencies
Dec. 31, 2011
Commitments and Contingencies

4. Commitments and Contingencies

 

Rental expense related to office, equipment, warehouse space and real estate amounted to $14,277, $11,768, and $10,293 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. The Company recognizes rental expense on a straight-line basis over the lease term.

 

 

Future minimum lease payments are as follows:

 

Year   Amount  
       
2012   $ 13,549  
2013     12,251  
2014     10,902  
2015     8,211  
2016     5,833  
Thereafter     6,423  
Total   $ 57,169  

 

Certain cash balances of GEL are held as collateral by a bank, securing payment of the United Kingdom value-added tax requirements. The total amount of restricted cash balances were $771 and $1,277 at December 31, 2011 and December 25, 2010, respectively.

 

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

Employee Benefit Plans
Dec. 31, 2011
Employee Benefit Plans

5. Employee Benefit Plans

 

GII sponsors a defined contribution employee retirement plan under which its employees may contribute up to 50% of their annual compensation subject to Internal Revenue Code maximum limitations and to which GII contributes a specified percentage of each participant’s annual compensation up to certain limits as defined in the Plan. Additionally, GEL has a defined contribution plan under which its employees may contribute up to 7.5% of their annual compensation. Both GII and GEL contribute an amount determined annually at the discretion of the Board of Directors. During the years ended December 31, 2011, December 25, 2010, and December 26, 2009, expense related to these plans of $20,647, $17,952, and $16,399 was charged to operations.

 

Certain of the Company’s foreign subsidiaries participate in local defined benefit pension plans. Contributions are calculated by formulas that consider final pensionable salaries. Neither obligations nor contributions for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, were significant.

Income Taxes
Dec. 31, 2011
Income Taxes

6. Income Taxes

 

The Company’s income tax provision (benefit) consists of the following:

 

    Fiscal Year Ended  
    December 31,     December 25,     December 26,  
    2011     2010     2009  
Federal:                        
Current   $ 79,305     ($ 46,674 )   $ 104,186  
Deferred     (25,763 )     284       (12,021 )
      53,542       (46,390 )     92,165  
State:                        
Current     9,087       3,929       5,381  
Deferred     (4,490 )     (257 )     (947 )
      4,597       3,672       4,434  
Foreign:                        
Current     22,363       31,109       18,469  
Deferred     (17,237 )     4,278       (10,367 )
      5,126       35,387       8,102  
Total   $ 63,265     ($ 7,331 )   $ 104,701  

 

The income tax provision differs from the amount computed by applying the U.S. statutory federal income tax rate to income before taxes. The sources and tax effects of the differences, including the impact of establishing tax contingency accruals, are as follows:

 

    December 31,     December 25,     December 26,  
    2011     2010     2009  
Federal income tax expense at U.S. statutory rate   $ 204,456     $ 202,045     $ 287,228  
State income tax expense, net of federal tax effect     2,988       2,482       2,604  
Foreign tax rate differential     (148,058 )     (115,633 )     (219,482 )
Taiwan tax holiday benefit     (13,127 )     (13,536 )     (18,556 )
Net change in uncertain tax postions     8,283       (102,100 )     41,400  
Other foreign taxes less incentives and credits     9,658       26,707       10,379  
Other, net     (935 )     (7,296 )     1,128  
Income tax expense   $ 63,265     ($ 7,331 )   $ 104,701  

 

The holding company statutory federal income tax rate in Switzerland, the Company's place of incorporation since the redomestication effective June 27, 2010 (see Note 12), is 7.83%.  If the Company reconciled taxes at the Swiss holding company federal statutory tax rate to the reported income tax for 2011, as presented above, the amounts related to tax at the statutory rate would be approximately $158,716 lower, or $45,740, and the foreign tax rate differential would be adjusted by a similar amount to $10,658. For 2010, the amounts related to tax at the U.S. statutory rate of 35% prior to the redomestication and the Swiss statutory rate of 7.83%, subsequent to the redomestication, would be approximately $95,985 lower, or $106,060, and the foreign tax differential would be reduced by the same amount to ($19,648). All other amounts would remain substantially unchanged.

 

The Company’s income before income taxes attributable to non-U.S. operations was $473,994, $413,550, and $678,868, for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. The Taiwan tax holiday benefits included in the table above reflect $0.07, $0.07, and $0.09 per weighted-average common share outstanding for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. The Company currently expects to benefit from these Taiwan tax holidays through 2016, at which time these tax benefits might expire.

 

 

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

    December 31,     December 25,  
    2011     2010  
Deferred tax assets:                
Product warranty accruals   $ 2,196     $ 1,646  
Allowance for doubtful accounts     12,282       11,572  
Inventory reserves     5,114       5,749  
Sales program allowances     5,591       9,080  
Reserve for sales returns     2,240       2,715  
Other accruals     5,359       5,684  
Unrealized intercompany profit in inventory     15,165       2,792  
Unrealized foreign currency loss     -       266  
Stock option compensation     47,998       40,785  
Tax credit carryforwards, net     33,379       48,784  
Amortization     26,913       28,431  
Deferred revenue     28,905       10,671  
Net operating losses of subsidiaries     17,780       11,583  
Other     4,163       3,750  
Valuation allowance related to loss carryforward and tax credits     (37,173 )     (51,352 )
      169,912       132,156  
Deferred tax liabilities:                
Depreciation     17,600       16,030  
Prepaid expenses     3,328       4,145  
Book basis in excess of tax basis for acquired entities     8,191       6,604  
Unrealized investment gain     910       5,951  
Marketable securities     -       3,038  
Other     469       933  
      30,498       36,701  
Net deferred tax assets   $ 139,414     $ 95,455  

 

The Company recognized a $29,615 deferred tax asset during 2010 for the future tax benefit of the fair market value step-up in basis of intangible assets related to the redomestication to Switzerland and local statutory tax reporting requirements. The deferred tax asset was recognized as an increase to Additional Paid-In Capital in 2010 and will reverse as the intangible assets are amortized for Swiss statutory and tax reporting purposes.

 

At December 31, 2011, the Company had $33,379 of tax credit carryover which includes $31,240 of Taiwan surtax credit with no expiration. There is a full valuation allowance for the Taiwan surtax credits. The valuation allowance decreased by $14,179 during 2011 including $14,994 related to Taiwan surtax credits. The decrease in the surtax credit carryforward and valuation allowance in 2011 is principally due to reducing the amount of such credits to the correct amount available for use in future years, on which a full valuation reserve is provided.

 

At December 31, 2011, the Company had a deferred tax asset of $17,780 related to the future tax benefit on net operating loss (NOL) carryforwards of $72,197.  Included in the NOL carryforwards is $24,680 that relates to Spain and expires in varying amounts between 2022 and 2025, $14,718 that relates to Switzerland and expires in 2018, and $32,799 that relates to various other jurisdictions and has no expiration date. The Company has recorded a valuation allowance for a portion of its deferred tax asset relating to various tax attributes that it does not believe are more likely than not to be realized. In the future, if the Company determines, based on existence of sufficient evidence, that it should realize more or less of its deferred tax assets, an adjustment to the valuation allowance will be made in the period such a determination is made.

Fair Value of Financial Instruments
Dec. 31, 2011
Fair Value of Financial Instruments

7. Fair Value of Financial Instruments

 

As required by the Financial Instruments topic of the FASB ASC, the following summarizes required information about the fair value of certain financial instruments for which it is currently practicable to estimate such value. None of the financial instruments are held or issued for trading purposes. The carrying amounts and fair values of the Company’s financial instruments are as follows:

 

    December 31, 2011     December 25, 2010  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value  
                         
Cash and cash equivalents   $ 1,287,160     $ 1,287,160     $ 1,260,936     $ 1,260,936  
Restricted cash     771       771       1,277       1,277  
Marketable securities     1,208,155       1,208,155       801,819       801,819  

 

For certain of the Company’s financial instruments, including accounts receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

Segment Information
Dec. 31, 2011
Segment Information

8. Segment Information

 

Beginning in 2011, for external reporting purposes, the Company identified five operating segments – auto/mobile, aviation, marine, outdoor and fitness. Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker (CODM), who allocates resources and assesses performance of each segment individually. Prior to 2011, the Outdoor and Fitness operating segments were combined into a single reportable segment due to the similar nature of those products, their production processes, the types of customers served, their distribution processes, and similar economic conditions. Management re-evaluated the combination of these operating segments and determined that based on the growth characteristics of these segments they should now be reported as two distinct reportable segments.

 

All of the Company’s reportable segments offer products through the Company’s network of independent dealers and distributors as well as through OEM’s. However, the nature of products and types of customers for the five reportable segments vary. The Company’s marine, auto/mobile, outdoor, and fitness segments include portable global positioning system (GPS) receivers and accessories sold primarily to retail outlets. These products are produced primarily by the Company’s subsidiary in Taiwan. The Company’s aviation products are portable and panel mount avionics for Visual Flight Rules and Instrument Flight Rules navigation and are sold primarily to aviation dealers and certain aircraft manufacturers.

 

The Company’s Chief Executive Officer has been identified as the CODM. The CODM evaluates performance and allocates resources based on income before income taxes of each segment. Income before income taxes represents net sales less operating expenses including certain allocated general and administrative costs, interest income and expense, foreign currency adjustments, and other non-operating corporate expenses. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies. There are no inter-segment sales or transfers.

 

The Company’s reportable segments share many common resources, infrastructures and assets in the normal course of business. Thus, the Company does not report accounts receivable, inventories, property and equipment, intangible assets, or capital expenditures by segment to the CODM.

 

Revenues, interest income and interest expense, and income before income taxes for each of the Company’s reportable segments are presented below:

 

 

    Fiscal Year Ended December 31, 2011  
                            Auto/        
    Aviation     Outdoor     Fitness     Marine     Mobile     Total  
                                     
Net sales to external customers   $ 284,855     $ 363,223     $ 298,163     $ 221,730     $ 1,590,598     $ 2,758,569  
Allocated interest income     1,250       4,496       4,342       2,934       19,790       32,812  
Allocated interest expense     -       -       -       -       -       -  
Income before income taxes     73,226       171,245       107,881       60,092       171,717       584,161  

 

    Fiscal Year Ended December 25, 2010  
                            Auto/        
    Aviation     Outdoor     Fitness     Marine     Mobile     Total  
                                     
Net sales to external customers   $ 262,520     $ 319,119     $ 240,473     $ 198,860     $ 1,668,939     $ 2,689,911  
Allocated interest income     1,251       2,347       1,532       1,624       18,225       24,979  
Allocated interest expense     (122 )     (148 )     (111 )     (92 )     (773 )     (1,246 )
Income before income taxes     71,482       150,973       86,499       62,431       205,887       577,272  

 

    Fiscal Year Ended December 26, 2009  
                            Auto/        
    Aviation     Outdoor     Fitness     Marine     Mobile     Total  
                                     
Net sales to external customers   $ 245,745     $ 299,300     $ 169,624     $ 177,644     $ 2,054,127     $ 2,946,440  
Allocated interest income     737       760       1,076       1,469       19,477       23,519  
Allocated interest expense     -       -       -       -       -       -  
Income before income taxes     56,595       147,996       58,046       57,430       488,584       808,651  

 

Net sales, long-lived assets (property and equipment), and net assets by geographic area are as shown below for the years ended December 31, 2011, December 25, 2010, and December 26, 2009. Note that APAC includes Asia Pacific and EMEA includes Europe, the Middle East and Africa.

 

    Americas     APAC     EMEA     Total  
December 31, 2011                                
Net sales to external customers   $ 1,527,508     $ 248,057     $ 983,004     $ 2,758,569  
Long lived assets     225,505       143,913       47,687       417,105  
Net assets (1)     1,155,653       1,915,284       185,644       3,256,581  
                                 
December 25, 2010                                
Net sales to external customers   $ 1,646,590     $ 220,478     $ 822,843     $ 2,689,911  
Long lived assets     231,569       146,859       49,377       427,805  
Net assets (1)     1,149,826       1,719,769       179,967       3,049,562  
                                 
December 26, 2009                                
Net sales to external customers   $ 1,972,451     $ 149,920     $ 824,069     $ 2,946,440  
Long lived assets     233,573       153,878       53,887       441,338  
Net assets (1)     1,177,849       1,467,903       190,695       2,836,447  

 

(1) Majority of assets held in the United States and Taiwan.

Stock Compensation Plans
Dec. 31, 2011
Stock Compensation Plans

9. Stock Compensation Plans

 

Accounting for Stock-Based Compensation

 

The various Company stock compensation plans are summarized below. For all stock compensation plans, the company’s policy is to issue treasury shares for option/SAR exercises, RSU releases and ESPP purchases.

 

 

2011 Non-employee Directors’ Equity Incentive Plan

 

In June 2011, the stockholders adopted an equity incentive plan for non-employee directors (the 2011 Directors Plan) providing for grants of stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and/or performance shares, pursuant to which up to 122,592 shares were available for issuance. The term of each award cannot exceed ten years. Awards may vest over a minimum two-year period. During 2011, 11,996 restricted stock units were granted under this plan.

 

2005 Equity Incentive Plan

 

In June 2005, the shareholders adopted an equity incentive plan (the “2005 Plan”) providing for grants of incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and/or performance shares to employees of the Company and its subsidiaries, pursuant to which up to 10,000,000 common shares were available for issuance. The various grants vest evenly over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. During 2011, 2010, and 2009, 410,197, 494,995, and 470,950 restricted stock units were granted under the 2005 Plan. In addition, in 2011, 42,330 stock options were granted under the 2005 Plan. In 2010 and 2009, 20,000 and 30,000 performance shares were granted under the 2005 Plan. No performance shares were granted under the 2005 Plan in 2011.

 

2000 Equity Incentive Plan

 

In October 2000, the shareholders adopted an equity incentive plan (the “2000 Plan”) providing for grants of incentive and nonqualified stock options, stock appreciation rights (“SARs”), restricted stock units (“RSUs”) and/or performance shares to employees of the Company and its subsidiaries, pursuant to which up to 7,000,000 common shares were available for issuance. The stock options and stock appreciation rights vest evenly over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. The Company did not grant any stock awards from the 2000 Plan in 2011, 2010 or 2009.

 

2000 Non-employee Directors’ Option Plan

 

Also in October 2000, the stockholders adopted a stock option plan for non-employee directors (the 2000 Directors Plan) providing for grants of options for up to 100,000 common shares. The term of each award is ten years. All awards vest evenly over a three-year period. During 2010 and 2009, options to purchase 23,924 and 34,648 shares, respectively, were granted under this plan. In 2009, the stockholders approved an additional 150,000 shares to the plan, making the total shares authorized under the plan 250,000. Following the June 2011 approval of the 2011 Directors Plan, the Company will no longer issue options to purchase shares under this plan.

 

Stock-Based Compensation Activity

 

A summary of the Company’s stock-based compensation activity and related information under the 2011 Directors Plan, the 2005 Plan, the 2000 Plan and the 2000 Directors Plan for the years ended December 31, 2011, December 25, 2010, and December 26, 2009 is provided below:

 

 

    Stock Options and SARs  
    Weighted-Average        
    Exercise Price     Number of Shares  
          (In Thousands)  
             
Outstanding at December 27, 2008   $ 47.76       10,526  
Granted   $ 23.09       35  
Exercised   $ 18.08       (278 )
Forfeited/Expired   $ 59.55       (174 )
Outstanding at December 26, 2009   $ 48.28       10,109  
Granted   $ 33.44       24  
Exercised   $ 15.52       (826 )
Forfeited/Expired   $ 62.57       (221 )
Outstanding at December 25, 2010   $ 50.87       9,086  
Granted   $ 39.71       42  
Exercised   $ 21.02       (764 )
Forfeited/Expired   $ 64.63       (291 )
Outstanding at December 31, 2011   $ 53.14       8,073  
Exercisable at December 31, 2011   $ 51.24       7,001  
Expected to vest after December 31, 2011   $ 65.59       1,049  

 

Stock Options and SARs as of December 31, 2011
Exercise   Awards     Remaining     Awards  
Price   Outstanding     Life (Years)     Exercisable  
    (In Thousands)           (In Thousands)  
                   
$8.00 -$20.00     787       2.29       786  
$20.01 - $40.00     1,530       3.48       1,463  
$40.01 - $60.00     3,295       5.36       2,782  
$60.01 - $80.00     1,198       5.42       960  
$80.01 - $100.00     2       5.94       1  
$100.01 - $120.00     1,258       5.91       1,007  
$120.01 - $140.00     3       5.74       2  
      8,073       4.80       7,001  

 

    Restricted Stock Units  
    Weighted-Average        
    Grant Date Fair Value     Number of Shares  
          (In Thousands)  
             
Outstanding at December 27, 2008   $ 19.59       1,043  
Granted   $ 29.79       501  
Released/Vested   $ 19.59       (204 )
Cancelled   $ 19.63       (24 )
Outstanding at December 26, 2009   $ 23.47       1,316  
Granted   $ 30.29       515  
Released/Vested   $ 23.02       (291 )
Cancelled   $ 23.32       (37 )
Outstanding at December 25, 2010   $ 25.90       1,503  
Granted   $ 37.28       422  
Released/Vested   $ 37.73       (366 )
Cancelled   $ 25.89       (81 )
Outstanding at December 31, 2011   $ 29.40       1,478  

 

 

The weighted-average remaining contract life for stock options and SARs outstanding and exercisable at December 31, 2011 is 4.80 and 4.57 years, respectively. The weighted-average remaining contract life of restricted stock units at December 31, 2011 was 2.21 years.

 

The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 2011, 2010, and 2009:

 

    2011     2010     2009  
Weighted average grant date fair value of options granted   $ 10.53     $ 8.99     $ 7.32  
Expected volatility     0.4078       0.4178       0.4286  
Dividend yield     4.02 %     4.94 %     2.42 %
Expected life of options in years     6.5       6.3       6.2  
Risk-free interest rate     1.2 %     2.5 %     3.0 %

 

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options and SARs which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility.

 

The total fair value of awards vested during 2011, 2010, and 2009 was $49,006, $41,249, and $41,527, respectively. The aggregate intrinsic values of options and SARs outstanding and exercisable at December 31, 2011 were $35,683 and $35,410, respectively. The aggregate intrinsic values of options and SARs exercised during 2011, 2010, and 2009 were $14,367, $12,259, and $3,578, respectively. The aggregate intrinsic value of RSUs outstanding at December 31, 2011 was $58,856. The aggregate intrinsic values of RSUs released during 2011, 2010, and 2009 were $14,592, $8,828, and $6,327, respectively. Aggregate intrinsic value represents the positive difference between the Company’s closing stock price on the last trading day of the fiscal period, which was $39.81 on December 30, 2011, and the exercise price multiplied by the number of options exercised. As of December 31, 2011, there was $58,554 of total unrecognized compensation cost related to unvested share-based compensation awards granted to employees under the stock compensation plans. That cost is expected to be recognized over the weighted average remaining vesting period.

 

Employee Stock Purchase Plan

 

The shareholders also adopted an employee stock purchase plan (ESPP). Up to 4,000,000 shares of common stock have been reserved for the ESPP with shareholders approving an additional 2,000,000 shares in May 2010. Shares will be offered to employees at a price equal to the lesser of 85% of the fair market value of the stock on the date of purchase or 85% of the fair market value on the first day of the ESPP period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code. During 2011, 2010, and 2009, 514,218, 349,173, and 209,416 shares, respectively were purchased under the plan for a total purchase price of $13,746, $8,134, and $3,874, respectively. During 2011 and 2010, the purchases were issued from treasury shares. At December 31, 2011, approximately 1,561,066 shares were available for future issuance.

Earnings Per Share
Dec. 31, 2011
Earnings Per Share

10. Earnings Per Share

 

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

 

    Fiscal Year Ended  
    December 31,     December 25,     December 26,  
    2011     2010     2009  
Numerator (in thousands):                  
Numerator for basic and diluted net income per share - net income   $ 520,896     $ 584,603     $ 703,950  
                         
Denominator (in thousands):                        
Denominator for basic net income per share - weighted-average common shares     194,105       196,979       200,395  
Effect of dilutive securities - employee stock-based awards     789       1,030       766  
Denominator for diluted net income per share - weighted-average common shares     194,894       198,009       201,161  
                         
Basic net income per share   $ 2.68     $ 2.97     $ 3.51  
                         
Diluted net income per share   $ 2.67     $ 2.95     $ 3.50  

 

Options to purchase 5,920,076, 6,192,043, and 7,814,095 common shares were outstanding during 2011, 2010, and 2009, respectively, but were not included in the computation of diluted earnings per share because the effect was antidilutive.

Share Repurchase Program
Dec. 31, 2011
Share Repurchase Program

11. Share Repurchase Program

 

The Board of Directors approved a share repurchase program on February 12, 2010, authorizing the Company to purchase up to $300,000 of its common shares as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The share repurchase authorization expired on December 31, 2011. Under the plan, the Company had repurchased 7,366,646 shares using cash of $223,149 in fiscal 2010.

 

In addition, 522,856 shares repurchased for $16,701 prior to the Company’s redomestication to Switzerland on June 27, 2010, but for which transactions settled after that date, were treated as retired when such shares were still in treasury. These shares were reflected as additional treasury shares during the 13-weeks ended March 26, 2011 with a corresponding increase to retained earnings.

 

The Board of Directors approved a share repurchase program on October 22, 2008, authorizing the Company to purchase up to $300,000 of its common shares as market and business conditions warrant. The share repurchase authorization expired on December 31, 2009. From inception to expiration, $60,000 of common shares were repurchased and retired under this plan.

Redomestication
Dec. 31, 2011
Redomestication

12. Redomestication

 

The redomestication effectively changed the place of incorporation of the ultimate parent holding company of Garmin from the Cayman Islands to Switzerland.

 

The redomestication involved several steps. On February 9, 2010, Garmin Ltd. (Cayman) formed Garmin Ltd. (Switzerland) as a direct subsidiary. On April 6, 2010, Garmin Ltd. (Cayman) petitioned the Cayman Court to order, among other things, the calling of a meeting of Garmin Ltd. (Cayman) common shareholders to approve a scheme of arrangement. On April 7, 2010, the Cayman Court ordered us to seek shareholder approval of the scheme of arrangement. On May 20, 2010 we obtained the necessary shareholder approval.  On June 4, 2010, a hearing was held by the Cayman Court and at which hearing the Cayman Court was asked to and did approve the scheme of arrangement.  The scheme of arrangement became effective at 3:00 a.m., Cayman Islands time, on Sunday, June 27, 2010 (the “Transaction Time”).

 

 

At and shortly following the Transaction Time, the following steps occurred:

 

1. all issued and outstanding Garmin Ltd. (Cayman) common shares were transferred to Garmin Ltd. (Switzerland); and
2. in consideration, Garmin Ltd. (Switzerland) (a) issued registered shares (on a one-for-one basis) to the holders of the Garmin Ltd. (Cayman) common shares that were transferred to Garmin Ltd. (Switzerland), and (b) increased the par value of the 10,000,000 shares of Garmin Ltd. (Switzerland) issued to Garmin Ltd. (Cayman) in connection with the formation of Garmin Ltd. (Switzerland) (the “Formation Shares”) to the same par value as the shares of Garmin Ltd. (Switzerland) issued to the Garmin Ltd. (Cayman) shareholders. The Formation Shares were subsequently transferred by Garmin Ltd. (Cayman) to its subsidiary, Garmin Luxembourg S.à r.l. for future use to satisfy our obligations to deliver shares in connection with awards granted under our equity incentive plans for employees and other general corporate purposes.

 

As a result of the redomestication, the shareholders of Garmin Ltd. (Cayman) became shareholders of Garmin Ltd. (Switzerland), and Garmin Ltd. (Cayman) became a subsidiary of Garmin Ltd. (Switzerland). In addition, Garmin Ltd. (Switzerland) assumed, on a one-for-one basis, Garmin Ltd. (Cayman)’s existing obligations in connection with awards granted under Garmin Ltd. (Cayman)’s equity incentive plans and other similar equity awards. Any stock options, stock appreciation rights, restricted stock units or performance shares issued by Garmin Ltd. (Cayman) that are convertible, exchangeable or exercisable into common shares of Garmin Ltd. (Cayman) became convertible, exchangeable or exercisable, as the case may be, into registered shares of Garmin Ltd. (Switzerland).

 

Subsequently on July 26, 2010, Garmin Ltd. (Cayman) relocated its registered office to Switzerland and changed its name to Garmin Switzerland GmbH.  The reported capitalization of the Company also changed to that of Garmin Ltd. (Switzerland).  Accordingly, common stock was increased by $1,796,448 to $1,797,435 (198,077,418 shares * CHF 10/ USD 9.0744), and retained earnings was reduced by the same amount.  

 

The summary of the components of authorized shares at December 31, 2011 and December 25, 2010, and changes during 2011 are as follows:

 

    Outstanding     Treasury     Issued     Conditional     Authorized  
    Shares     Shares     Shares1     Capital     Capital  
Changes in components of authorized shares                                        
December 25, 2010     194,358,038       13,719,380 2      208,077,418 2,3      104,038,709 4      104,038,709 4 
Treasury shares purchased/reclassified     (1,149,645 )     1,149,645 5     -       -       -  
Treasury shares issued for stock based compensation     1,454,224       (1,454,224 )     -       -       -  
December 31, 2011     194,662,617       13,414,801       208,077,418       104,038,709       104,038,709  

 

1 Shares at CHF 10 par value (USD 9.0744)
2 Includes 10,000,000 formation shares at USD 0 historical cost
3 The par value of the share capital presented on the face of the balance sheet and in the consolidated statements of stockholders equity excludes the par value of the 10,000,000 formation shares.
4 Up to 104,038,709 conditional shares may be issued through the exercise of option rights which are granted to Garmin employees and/or members of its Board of Directors. In addition, the Board of Directors is authorized to issue up to 104,038,709 additional shares no later than June 27, 2012.
5 The increase in treasury shares in 2011 includes 522,856 shares repurchased in the prior year that were originally treated as retired when such shares were still in treasury. These shares are reflected as additional treasury shares in 2011 with a corresponding increase to retained earnings. See Note 11.

 

The general terms of Garmin Ltd. (Switzerland)'s capitalization (rights of shareholders, limitations on dividends, etc.) may be found in the proxy statement and Form 8-A/A registration statement filed with the SEC on April 9, 2010 and June 28, 2010, respectively.

Warranty Reserves
Dec. 31, 2011
Warranty Reserves

13. Warranty Reserves

 

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 expectations 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:

 

    Fiscal Year Ended  
    December 31,     December 25,     December 26,  
    2011     2010     2009  
                   
Balance - beginning of period   $ 49,885     $ 87,424     $ 87,408  
Change in accrual for products sold in prior periods     -       (42,776 )     -  
Accrual for products sold during the period     52,305       93,172       164,909  
Expenditures     (55,417 )     (87,935 )     (164,893 )
Balance - end of period   $ 46,773     $ 49,885     $ 87,424
Selected Quarterly Information (Unaudited)
Dec. 31, 2011
Selected Quarterly Information (Unaudited)

14. Selected Quarterly Information (Unaudited)

 

    Fiscal Year Ended December 31, 2011  
    Quarter Ending  
    March 26     June 25     September 24 (2)     December 31 (2)  
                         
Net sales   $ 507,834     $ 674,099     $ 666,993     $ 909,643  
Gross profit     238,374       322,100       344,331       433,787  
Net income     95,482       109,477       150,381       165,556  
Basic net income per share   $ 0.49     $ 0.56     $ 0.77     $ 0.86  

 

    Fiscal Year Ended December 25, 2010  
    Quarter Ending  
    March 27     June 26     September 25 (1)     December 25  
                         
Net sales   $ 431,067     $ 728,765     $ 692,364     $ 837,715  
Gross profit     230,909       391,652       344,020       379,793  
Net income     37,329       134,816       279,552       132,906  
Basic net income per share   $ 0.19     $ 0.68     $ 1.43     $ 0.67  

 

(1) Net income and Basic net income per share for quarter ending September 25, 2010 include a one-time tax adjustment of ($98.7) million which includes release of uncertain tax position reserves from 2006 to 2008 related to our settlement with the IRS in the US, partially offset by the amount of the settlement for the 2007 tax year in the US and Taiwan surtax expense due to the release of reserves.

 

(2) Amounts shown for quarters ending September 24, 2011 and December 31, 2011 include a change in estimate for the Company's per unit revenue and cost deferrals. The impact to net sales, gross profit, net income, and basic net income per share for the quarter ending September 24, 2011 was $21.4 million, $17.8 million, $15.3 million and $0.07, respectively. The impact to net sales, gross profit, net income, and basic net income per share for the quarter ending December 31, 2011 was $56.4 million, $48.7 million, $44.0 million, and $0.24, respectively.

 

The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included. These results are not necessarily indicative of future quarterly results.

Acquisitions
Dec. 31, 2011
Acquisitions

15. Acquisitions

 

During 2011, subsidiaries of Garmin Ltd. completed the following acquisitions:

 

· Navigon AG (“Navigon”), a privately-held navigation provider based in Germany

 

· Tri-Tronics Inc., the leading designer and manufacturer of electronic dog training equipment

 

· Garmin Distribution Africa (Pty) Ltd., the distributor of Garmin’s consumer products in Southern Africa

 

· Garmap (Pty) Ltd., a South African mapping and mobile applications provider

 

· Centro GPS, the Chilean distributor of Garmin’s consumer products

 

These companies were acquired for an aggregate amount of $69,558 in cash less $15,368 cash acquired. The purchase price allocation for these acquisitions included goodwill and intangible assets of $84,204. Garmin also recognized $3,923 of restructuring costs in the third quarter of 2011 related specifically to the Navigon acquisition. Individually and in the aggregate, these acquisitions are not considered material; therefore, supplemental pro forma information is not presented. The allocation of purchase price to assets acquired and liabilities assumed in these acquisitions is based upon certain valuations and other analyses.

 

Purchase price allocations for 2010 acquisitions were finalized with no significant adjustments.

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Dec. 31, 2011
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

Garmin Ltd. and Subsidiaries

(In thousands)

 

          Additions              
    Balance at     Charged to     Charged to           Balance at  
    Beginning of     Costs and     Other           End of  
Description   Period     Expenses     Accounts     Deductions     Period  
Year Ended December 31, 2011:                                        
Deducted from asset accounts                                        
Allowance for doubtful accounts   $ 31,822     $ 2,317       -     $ (3,915 )   $ 30,224  
Inventory reserve     37,720       16,047       -       (24,397 )     29,370  
Deferred tax asset valuation allowance (1)     51,352       7,902       -       (22,081 )     37,173  
Total   $ 120,894     $ 26,266       -     $ (50,393 )   $ 96,767  
                                         
Year Ended December 25, 2010:                                        
Deducted from asset accounts                                        
Allowance for doubtful accounts   $ 36,673     $ (4,476 )     -     $ (375 )   $ 31,822  
Inventory reserve     38,898       5,753       -       (6,931 )     37,720  
Deferred tax asset valuation allowance     35,617       15,735       -       -       51,352  
Total   $ 111,188     $ 17,012       -     $ (7,306 )   $ 120,894  
                                         
Year Ended December 26, 2009:                                        
Deducted from asset accounts                                        
Allowance for doubtful accounts   $ 42,409     $ (1,332 )     -     $ (4,404 )   $ 36,673  
Inventory reserve     23,204       61,323       -       (45,629 )     38,898  
Deferred tax asset valuation allowance     34,487       1,468       -       (338 )     35,617  
Total   $ 100,100     $ 61,459       -     $ (50,371 )   $ 111,188  

 

(1) Note that $14,994 of the decrease in the deferred tax asset valuation is due to reducing the amount of Taiwan surtax credits to the correct amount available for use in future years, all such credits of which are and have been fully reserved.
Summary of Significant Accounting Policies (Policies)
Dec. 31, 2011
Basis of Presentation and Principles of Consolidation
Fiscal Year
Foreign Currency
Earnings Per Share
Cash and Cash Equivalents
Trade Accounts Receivable
Inventories
Property and Equipment
Long-Lived Assets
Dividends
Intangible Assets
Marketable Securities
Income Taxes
Use of Estimates
Concentration of Credit Risk
Revenue Recognition
Deferred Revenues and Costs
Shipping and Handling Costs
Product Warranty
Sales Programs
Advertising Costs
Research and Development
Customer Service and Technical Support
Software Development Costs
Accounting for Stock-Based Compensation
Recently Issued Accounting Pronouncements

Basis of Presentation and Principles of Consolidation

 

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The accompanying consolidated financial statements reflect the accounts of Garmin Ltd. and its wholly-owned subsidiaries. All significant inter-company balances and transactions have been eliminated.

Fiscal Year

 

The Company has adopted a 52–53-week period ending on the last Saturday of the calendar year. Due to the fact that there are not exactly 52 weeks in a calendar year and there is slightly more than one additional day per year (not including the effects of leap year) in each calendar year as compared to a 52-week fiscal year, the Company will have a fiscal year comprising 53 weeks in certain fiscal years, as determined by when the last Saturday of the calendar year occurs.

 

In those resulting fiscal years that have 53 weeks, the Company will record an extra week of sales, costs, and related financial activity. Therefore, the financial results of those fiscal years, and the associated 14-week fourth quarter, will not be entirely comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. Fiscal 2010 and 2009 included 52 weeks while fiscal 2011 included 53 weeks.

Foreign Currency

 

Many Garmin Ltd. subsidiaries utilize currencies other than the United States Dollar (USD) as their functional currency. As required by the Foreign Currency Matters topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC), the financial statements of these subsidiaries for all periods presented have been translated into USD, the functional currency of Garmin Ltd., and the reporting currency herein, for purposes of consolidation at rates prevailing during the year for sales, costs, and expenses and at end-of-year rates for all assets and liabilities. The effect of this translation is recorded in a separate component of stockholders’ equity. Cumulative translation adjustments of $76,456 and $61,740 as of December 31, 2011 and December 25, 2010, respectively, have been included in accumulated other comprehensive gain/(loss) in the accompanying consolidated balance sheets.

 

 

Transactions in foreign currencies are recorded at the approximate rate of exchange at the transaction date. Assets and liabilities resulting from these transactions are translated at the rate of exchange in effect at the balance sheet date. All differences are recorded in results of operations and amounted to exchange losses of $12,100, $88,377, and $6,040 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. The loss in fiscal 2011 was primarily the result of the slight strengthening of the USD against the Euro and the slight weakening of the USD against the Taiwan Dollar. The loss in fiscal 2010 was primarily the result of the strengthening of the USD against the Euro and the British Pound Sterling and the weakening of the USD against the Taiwan Dollar. The loss in fiscal 2009 was primarily the result of the weakening of the USD against the Taiwan Dollar offset by the weakening of the USD against the Euro and the British Pound Sterling.

Earnings Per Share

 

Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. For purposes of diluted earnings per share, the number of shares that would be issued from the exercise of dilutive stock options has been reduced by the number of shares which could have been purchased from the proceeds of the exercise at the average market price of the Company’s stock during the period the options were outstanding. See Note 10.

Cash and Cash Equivalents

 

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, operating accounts, money market funds, and securities with maturities of three months or less when purchased. The carrying amount of cash and cash equivalents approximates fair value, given the short maturity of those instruments.

Trade Accounts Receivable

 

The Company sells its products to retailers, wholesalers, and other customers and extends credit based on its evaluation of the customer’s financial condition.  Potential losses on receivables are dependent on each individual customer’s financial condition. The Company carries its trade accounts receivable at net realizable value. Typically, its accounts receivable are collected within 80 days and do not bear interest. The Company monitors its exposure to losses on receivables and maintains allowances for potential losses or adjustments. The Company determines these allowances by (1) evaluating the aging of its receivables and (2) reviewing its high-risk customers. Past due receivable balances are written off when its internal collection efforts have been unsuccessful in collecting the amount due. In 2011, Garmin purchased credit insurance to provide security against large losses.

Inventories

 

Inventories are stated at the lower of cost or market. Cost is determined using the weighted-average method (which approximates the first-in, first-out (FIFO) method) by GC and the FIFO method by GII and GEL. Inventories consisted of the following:

 

    December 31, 2011     December 25, 2010  
             
Raw Materials   $ 129,211     $ 103,277  
Work-in-process     52,176       43,507  
Finished goods     245,724       278,513  
Inventory Reserves     (29,370 )     (37,720 )
Inventory, net of reserves   $ 397,741     $ 387,577

Property and Equipment

 

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:

 

Buildings and improvements 39
Office furniture and equipment 3-5
Manufacturing and engineering equipment 5
Vehicles 5

Long-Lived Assets

 

As required by the Property, Plant and Equipment topic of the FASB ASC, the Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be fully recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. That assessment is based on the carrying amount of the asset at the date it is tested for recoverability. An impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value.

 

The Intangibles – Goodwill and Other topic of the FASB ASC requires that goodwill and intangible assets with indefinite useful lives should not be amortized but rather be tested for impairment at least annually or sooner whenever events or changes in circumstances indicate that they may be impaired. The Company did not recognize any goodwill or intangible asset impairment charges in 2011, 2010, or 2009. The Company established reporting units based on its current reporting structure. For purposes of testing goodwill for impairment, goodwill has been allocated to these reporting units to the extent it relates to each reporting unit.  The accounting guidance also requires that intangible assets with finite lives be amortized over their estimated useful lives and reviewed for impairment. The Company is currently amortizing its acquired intangible assets with finite lives over periods ranging from 3 to 10 years.

Dividends

  

On June 27, 2010, the Company completed the redomestication of the place of our incorporation from the Cayman Islands to Switzerland. Under Swiss corporate law, dividends must be approved by shareholders at the general meeting of our shareholders.

 

On June 3, 2011, the shareholders approved a dividend of $2.00 per share (of which, $1.60 was paid in the Company's 2011 fiscal year) payable in four installments as follows: $0.80 on June 30, 2011 to shareholders of record on June 15, 2011, $0.40 on September 30, 2011 to shareholders of record on September 15, 2011, $0.40 on December 30, 2011 to shareholders of record on December 15, 2011 and $0.40 on March 30, 2012 to shareholders of record on March 15, 2012. The Company paid dividends in 2011 in the amount of $310,763. Both the dividend paid and the remaining dividend payable have been reported as a reduction of retained earnings.

 

On March 16, 2010 the Board of Directors declared a dividend of $1.50 per share to be paid on April 30, 2010 to shareholders of record on April 15, 2010. The Company paid out a dividend in the amount of $298,853. The dividend was reported as a reduction of retained earnings.

 

On July 30, 2009 the Board of Directors declared a dividend of $0.75 per share to be paid on December 15, 2009 to shareholders of record on December 1, 2009. The Company paid out a dividend in the amount of $149,846. The dividend was reported as a reduction of retained earnings.

 

Approximately $239,470 and $213,486 of retained earnings are indefinitely restricted from distribution to stockholders pursuant to the laws of Taiwan at December 31, 2011 and December 25, 2010, respectively.

Intangible Assets

 

At December 31, 2011 and December 25, 2010, the Company had patents, license agreements, customer related intangibles and other identifiable finite-lived intangible assets recorded at a cost of $206,872 and $152,138, respectively. The Company’s excess purchase cost over fair value of net assets acquired (goodwill) was $179,475 at December 31, 2011 and $136,548 at December 25, 2010. The increase in identifiable intangible assets and goodwill in 2011 is principally related to the acquisitions completed by the Company, as further described in Note 15.

  

    December 31,
2011
    December 25,
2010
 
Goodwill balance at beginning of year   $ 136,548     $ 129,066  
Acquisitions     46,481       11,649  
Finalization of purchase price allocations and effect of foreign currency translation     (3,554 )     (4,167 )
Goodwill balance at end of year   $ 179,475     $ 136,548  

 

Identifiable, finite-lived intangible assets are amortized over their estimated useful lives on a straight-line basis over three to ten years. Accumulated amortization was $134,184 and $103,534 at December 31, 2011 and December 25, 2010 respectively. Amortization expense was $33,225, $36,675, and $37,444 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively. In the next five years, the amortization expense is estimated to be $28,464, $14,413, $9,518, $6,978, and $5,301, respectively.

Marketable Securities

 

Management determines the appropriate classification of marketable securities at the time of purchase and reevaluates such designation as of each balance sheet date.

 

All of the Company’s marketable securities were considered available-for-sale at December 31, 2011. See Note 3. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive gain/(loss). At December 31, 2011 and December 25, 2010, cumulative unrealized gains/(losses) of $10,737 and ($5,736), respectively, were reported in accumulated other comprehensive gain/(loss), net of related taxes.

 

The amortized cost of debt securities classified as available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Realized gains and losses, and declines in value judged to be other-than-temporary are included in other income. The cost of securities sold is based on the specific identification method.

Income Taxes

 

The Company accounts for income taxes using the liability method in accordance with the FASB ASC topic Income Taxes. The liability method provides that deferred tax assets and liabilities are recorded based on the difference between the tax bases of assets and liabilities and their carrying amount for financial reporting purposes as measured based on the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Income taxes of $252,793, $233,028, and $171,097 at December 31, 2011, December 25, 2010, and December 26, 2009, respectively, have not been accrued by the Company for the unremitted earnings of several of its foreign subsidiaries because such earnings are intended to be reinvested in the subsidiaries indefinitely.

 

The Company adopted the applicable guidance included in the FASB ASC topic Income Taxes related to accounting for uncertainty in income taxes on December 31, 2006, the beginning of fiscal year 2007.   The total amount of unrecognized tax benefits as of December 31, 2011 was $161,904 including interest of $10,850.  A reconciliation of the beginning and ending amount of unrecognized tax benefits for years ending December 31, 2011, December 25, 2010, and December 26, 2009 is as follows:

  

 

    December 31,     December 25,     December 26,  
    2011     2010     2009  
Balance at beginning of year   $ 153,621     $ 255,748     $ 214,366  
Additions based on tax positions related to prior years     5,568       11,443       14,241  
Reductions based on tax positions related to prior years     (6,885 )     (10,392 )     (16,141 )
Additions based on tax positions related to current period     29,210       43,202       63,053  
Reductions based on tax positions related to current period     -       -       -  
Reductions related to settlements with tax authorities     -       (122,314 )     -  
Expiration of statute of limitations     (19,610 )     (24,066 )     (19,771 )
Balance at end of year   $ 161,904     $ 153,621     $ 255,748  

 

The December 31, 2011 balance of $161,904 of unrecognized tax benefits, if recognized, would reduce the effective tax rate.  None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility. 

 

Accounting guidance requires unrecognized tax benefits to be classified as non-current liabilities, except for the portion that is expected to be paid within one year of the balance sheet date.  The entire $161,904, $153,621, and $255,748 are required to be classified as non-current at December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

 

Interest expense and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense.  At December 31, 2011, December 25, 2010, and December 26, 2009, the Company had accrued approximately $10,850, $9,580, and $20,160, respectively, for interest.  Interest expense (income) included in income tax expense for the years ending December 31, 2011, December 25, 2010, and December 26, 2009 is $5,568, ($10,580), and $9,000, respectively. The Company had no amounts accrued for penalties as the nature of the unrecognized tax benefits, if recognized, would not warrant the imposition of penalties.

 

The Company files income tax returns in Switzerland and U.S. federal jurisdictions, as well as various state, local and foreign jurisdictions.  The Company is no longer subject to U.S. federal, state, or local tax examinations by tax authorities for years prior to 2008.  The Company is no longer subject to Taiwan income tax examinations by tax authorities for years prior to 2006.  The Company is no longer subject to United Kingdom tax examinations by tax authorities for years prior to 2009.

  

The Company also considers 2008 U.S. federal returns to have been effectively settled due to completion of an audit examination by the Internal Revenue Service.  A reduction of income tax expense was recognized to reflect this settlement. In addition, the Company recognized a reduction of income tax expense of $19,610, $24,066, and $19,771 in fiscal years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively, to reflect the expiration of statutes of limitations in various jurisdictions.

 

The Company believes that it is reasonably possible that approximately $20,482 of its reserves for certain unrecognized tax benefits will decrease within the next 12 months as the result of the expiration of statutes of limitations. This potential decrease in unrecognized tax benefits would impact the Company’s effective tax rate within the next 12 months.

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Concentration of Credit Risk

 

The Company grants credit to certain customers who meet the Company’s pre-established credit requirements. Generally, the Company does not require security when trade credit is granted to customers. Credit losses are provided for in the Company’s consolidated financial statements and typically have been within management’s expectations. Certain customers are allowed extended terms consistent with normal industry practice. Most of these extended terms can be classified as either relating to seasonal sales variations or to the timing of new product releases by the Company.

 

 

The Company’s top ten customers have contributed between 29% and 36% of net sales since 2009. In 2011, the Company purchased trade credit insurance to provide security against large losses. Best Buy, a customer in the outdoor, fitness, marine and auto/mobile segments accounted for less than 10% of the Company’s consolidated net sales in the years ended December 31, 2011, and December 25, 2010, respectively, while accounting for 13.4% of the Company’s consolidated net sales in the year ended December 26, 2009.

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 that is 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 that involve multiple-element arrangements that are immaterial.

 

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 two deliverables contained in arrangements involving the sale of PNDs which include either the LMU 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 deliverable is either the LMU or premium traffic service. The Company has allocated revenue between these two 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 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, the Company 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 have 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 has 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 of the 2011 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.

 

In 2009 and 2010 respectively, Garmin introduced the nüvi 1690 and 1695, premium PNDs with a built-in wireless module that lets customers access Garmin’s nüLink!™ service, which provides direct links to certain online information.  Additional models were introduced in 2011. The Company has identified two deliverables contained in arrangements involving the sale of the nüvi products with the nüLink feature. The first deliverable is the hardware and software essential to the functionality of the hardware device delivered at the time of sale, and the second deliverable is the nüLink service. The Company has allocated revenue between these two deliverables using the relative selling price method determined using VSOE. 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 allocated to the nüLink services are deferred and recognized on a straight-line basis over the life of the service, which is either 12 or 24 months.

 

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, are 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.

 

 

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 the Company’s historical experience.

Deferred Revenues and Costs

  

At December 31, 2011 and December 25, 2010, the Company had deferred revenues totaling $377,119 and $197,787, respectively, and related deferred costs totaling $80,856 and $44,738, respectively.

 

The deferred revenues and costs are recognized over their estimated economic lives of two to three years on a straight-line basis. In the next three years, the gross margin recognition of deferred revenue and cost for the currently deferred amounts is estimated to be $148,954, $108,156, and $39,153, respectively.

Shipping and Handling Costs

 

Shipping and handling costs are included in cost of goods sold in the accompanying consolidated financial statements.

Product Warranty

  

The Company provides for estimated warranty costs at the time of sale. The warranty period for most products is one year to two years from date of shipment while certain aviation products have a warranty period of two years from the date of installation and certain marine products have a warranty period of three years from the date of shipment.

Sales Programs

 

The Company provides certain monthly and quarterly incentives for its dealers and distributors based on various factors including dealer purchasing volume and growth. Additionally, from time to time, the Company provides rebates to end users on certain products. Estimated rebates and incentives payable to dealers and distributors are regularly reviewed and recorded as accrued expenses on a monthly basis. In addition, the Company provides dealers and distributors with product discounts to assist these customers in clearing older products from their inventories in advance of new product releases. Each discount is tied to a specific product and can be applied to all customers who have purchased the product or a special discount may be agreed to on an individual customer basis. These rebates, incentives, and discounts are recorded as reductions to net sales in the accompanying consolidated statements of income in the period the Company has sold the product.

Advertising Costs

 

The Company expenses advertising costs as incurred. Advertising expense amounted to approximately $145,024, $144,613, and $155,521 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

Research and Development

 

A majority of the Company’s research and development is performed in the United States. Research and development costs, which are expensed as incurred, amounted to approximately $298,584, $277,261, and $238,378 for the years ended December 31, 2011, December 25, 2010, and December 26, 2009, respectively.

Customer Service and Technical Support

 

Customer service and technical support costs are included as selling, general and administrative expenses in the accompanying consolidated statements of income. Customer service and technical support costs include costs associated with performing order processing, answering customer inquiries by telephone and through Web sites, e-mail and other electronic means, and providing free technical support assistance to customers. The technical support is provided within one year after the associated revenue is recognized. The related cost of providing this free support is not material.

Software Development Costs

 

The FASB ASC topic entitled Software requires companies to expense software development costs as they incur them until technological feasibility has been established, at which time those costs are capitalized until the product is available for general release to customers. Capitalized software development costs are not significant as the time elapsed from working model to release is typically short. As required by the Research and Development topic of the FASB ASC, costs incurred to enhance our existing products or after the general release of the service using the product are expensed in the period they are incurred and included in research and development costs in the accompanying consolidated statements of income.

Accounting for Stock-Based Compensation

 

The Company currently sponsors four stock based employee compensation plans. The FASB ASC topic entitled Compensation – Stock Compensation requires the measurement and recognition of compensation expenses for all share-based payment awards made to employees and directors including employee stock options and restricted stock based on estimated fair values. See Note 9.

 

Accounting guidance requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as stock-based compensation expense on a straight-line basis over the requisite service period in the Company’s consolidated financial statements.

 

As stock-based compensation expenses recognized in the accompanying consolidated statements of income are based on awards ultimately expected to vest, they have been reduced for estimated forfeitures. Accounting guidance requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience and management’s estimates.

Recently Issued Accounting Pronouncements

 

In May 2011, the FASB issued an amendment to the accounting standards related to fair value measurements and disclosure requirements that result in a consistent definition of fair value and common requirements for the measurement and disclosure of fair value between U.S. GAAP and International Financial Reporting Standards. This standard provides certain amendments to the existing guidance on the use and application of fair value measurements and maintains a definition of fair value that is based on the notion of exit price. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. The Company is currently evaluating the impact of adopting this amendment, but it is not expected to have a material impact on the financial statements.

 

In June 2011, the FASB issued guidance on the presentation of comprehensive income. This guidance eliminates the current option to report other comprehensive income and its components in the statement of stockholders’ equity. The guidance allows two presentation alternatives; present items in net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive, statements of net income and other comprehensive income. This guidance is effective as of the beginning of a fiscal year that begins after December 15, 2011. Early adoption is permitted, but full retrospective application is required under both sets of accounting standards. The Company is currently evaluating which presentation alternative it will utilize.

 

 

 

In September 2011, the FASB issued an amendment to ASC 350, Intangibles—Goodwill and Other, which simplifies how entities test goodwill for impairment. Under the amendment, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the entity to determine that it is more likely than not that its fair value is less than its carrying amount. If after assessing the totality of events or circumstances, an entity determines that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then the two-step impairment test for goodwill is unnecessary. If the entity concludes otherwise, then it is required to test goodwill for impairment under the two-step process as described under paragraphs 350-20-35-4 of the ASC. If the carrying amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9 of the ASC. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and early adoption is permitted. The Company is currently evaluating the impact of adopting this amendment, but it is not expected to have a material impact on the financial statements.

Summary of Significant Accounting Policies (Tables)
Dec. 31, 2011
Inventories
Property, Plant and Equipment
Change in Carrying Amount of Goodwill
Summary of Income Tax Contingencies

Inventories consisted of the following:

 

    December 31, 2011     December 25, 2010  
             
Raw Materials   $ 129,211     $ 103,277  
Work-in-process     52,176       43,507  
Finished goods     245,724       278,513  
Inventory Reserves     (29,370 )     (37,720 )
Inventory, net of reserves   $ 397,741     $ 387,577

Property and equipment are recorded at cost and depreciated using the straight-line method over the following estimated useful lives:

 

Buildings and improvements 39
Office furniture and equipment 3-5
Manufacturing and engineering equipment 5
Vehicles 5
    December 31,
2011
    December 25,
2010
 
Goodwill balance at beginning of year   $ 136,548     $ 129,066  
Acquisitions     46,481       11,649  
Finalization of purchase price allocations and effect of foreign currency translation     (3,554 )     (4,167 )
Goodwill balance at end of year   $ 179,475     $ 136,548

A reconciliation of the beginning and ending amount of unrecognized tax benefits for years ending December 31, 2011, December 25, 2010, and December 26, 2009 is as follows:

  

 

    December 31,     December 25,     December 26,  
    2011     2010     2009  
Balance at beginning of year   $ 153,621     $ 255,748     $ 214,366  
Additions based on tax positions related to prior years     5,568       11,443       14,241  
Reductions based on tax positions related to prior years     (6,885 )     (10,392 )     (16,141 )
Additions based on tax positions related to current period     29,210       43,202       63,053  
Reductions based on tax positions related to current period     -       -       -  
Reductions related to settlements with tax authorities     -       (122,314 )     -  
Expiration of statute of limitations     (19,610 )     (24,066 )     (19,771 )
Balance at end of year   $ 161,904     $ 153,621     $ 255,748
Marketable Securities (Tables)
Dec. 31, 2011
Assets and Liabilities Measured at Estimated Fair Value on Recurring Basis
Reconciliation of Assets and Liabilities Measured at Fair Value on Recurring Basis Using Significant Unobservable Inputs (Level 3)
Marketable Securities Classified as Available-For-Sale Securities
Amortized Cost and Estimated Fair Value of Marketable Securities, by Contractual Maturity

Assets and liabilities measured at estimated fair value on a recurring basis are summarized below:

 

    Fair Value Measurements as  
    of December 31, 2011  
                         
Description   Total     Level 1     Level 2     Level 3  
                                 
Available for-sale securities   $ 1,208,155     $ 1,208,155     $ -     $ -  
                                 
Total   $ 1,208,155     $ 1,208,155     $ -     $ -  

 

    Fair Value Measurements as  
    of December 25, 2010  
                         
Description   Total     Level 1     Level 2     Level 3  
                         
Available for-sale securities   $ 781,257     $ 781,257     $ -     $ -  
Failed auction rate securities     20,562       -       -       20,562  
                                 
Total   $ 801,819     $ 781,257     $ -     $ 20,562

For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, the accounting guidance requires a reconciliation of the beginning and ending balances, separately for each major category of assets. The reconciliation is as follows:

 

    Fair Value Measurements Using  
    Significant Unobservable Inputs (Level 3)  
    Year Ended     Year Ended  
    December 31, 2011     December 25, 2010  
             
Beginning balance of auction rate securities   $ 20,562     $ 70,252  
Total unrealized gains included in other comprehensive income     5,038       16,410  
Sales out of Level 3     (25,600 )     (66,100 )
Transfers in and/or out of Level 3     -       -  
Ending balance of auction rate securities   $ -     $ 20,562

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

  

    Amortized Cost     Gross 
Unrealized Gains
    Gross
Unrealized
Losses
    Other Than
Temporary
Impairment
    Estimated Fair 
Value (Net Carrying
Amount)
 
Mortgage-backed securities   $ 626,776     $ 12,936     $ (1,086 )   $ -     $ 638,626  
Obligations of states and political subdivisions     358,314       2,339       (1,090 )     -       359,563  
U.S. corporate bonds     134,763       815       (2,260 )     (1,274 )     132,044  
Other     78,031       113       (222 )     -       77,922  
Total   $ 1,197,884     $ 16,203     $ (4,658 )   $ (1,274 )   $ 1,208,155  

 

 

The following is a summary of the company’s marketable securities classified as available-for-sale securities at December 25, 2010:

 

    Amortized Cost     Gross 
Unrealized Gains
    Gross
Unrealized
Losses
    Other Than
Temporary
Impairment
    Estimated Fair 
Value (Net Carrying
Amount)
 
Mortgage-backed securities   $ 527,249     $ 1,913     $ (1,519 )   $ -     $ 527,643  
Auction Rate Securities     25,599       -       (5,037 )     -       20,562  
Obligations of states and political subdivisions     160,618       347       (3,341 )     -       157,624  
U.S. corporate bonds     54,348       637       (185 )     (1,274 )     53,526  
Other     39,838       2,626       -       -       42,464  
Total   $ 807,652     $ 5,523     $ (10,082 )   $ (1,274 )   $ 801,819

The amortized cost and estimated fair value of marketable securities at December 31, 2011, 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. Included in the $55,694 amount below is $34,590 that has been classified as current because the underlying securities were sold subsequent to year-end. The remaining amount of $21,104 has been classified as noncurrent.

 

          Estimated  
    Cost     Fair Value  
                 
Due in one year or less (2012)   $ 76,427     $ 76,563  
Due after one year through five years (2013-2017)     370,827       370,551  
Due after five years through ten years (2018-2022)     311,251       313,073  
Due after ten years (2023 and thereafter)     385,017       392,274  
Other (No contractual maturity dates)     54,362       55,694  
    $ 1,197,884     $ 1,208,155
Commitments and Contingencies (Tables)
Dec. 31, 2011
Schedule of Future Minimum Rental Payments for Operating Leases
Schedule of Future Minimum Rental Payments for Operating Leases

Future minimum lease payments are as follows:

 

Year   Amount  
       
2012   $ 13,549  
2013     12,251  
2014     10,902  
2015     8,211  
2016     5,833  
Thereafter     6,423  
Total   $ 57,169
Income Taxes (Tables)
Dec. 31, 2011
Schedule of Components of Income Tax Expense (Benefit)
Schedule of Effective Income Tax Rate Reconciliation
Schedule of Deferred Tax Assets and Liabilities

The Company’s income tax provision (benefit) consists of the following:

 

    Fiscal Year Ended  
    December 31,     December 25,     December 26,  
    2011     2010     2009  
Federal:                        
Current   $ 79,305     ($ 46,674 )   $ 104,186  
Deferred     (25,763 )     284       (12,021 )
      53,542       (46,390 )     92,165  
State:                        
Current     9,087       3,929       5,381  
Deferred     (4,490 )     (257 )     (947 )
      4,597       3,672       4,434  
Foreign:                        
Current     22,363       31,109       18,469  
Deferred     (17,237 )     4,278       (10,367 )
      5,126       35,387       8,102  
Total   $ 63,265     ($ 7,331 )   $ 104,701

The sources and tax effects of the differences, including the impact of establishing tax contingency accruals, are as follows:

 

    December 31,     December 25,     December 26,  
    2011     2010     2009  
Federal income tax expense at U.S. statutory rate   $ 204,456     $ 202,045     $ 287,228  
State income tax expense, net of federal tax effect     2,988       2,482       2,604  
Foreign tax rate differential     (148,058 )     (115,633 )     (219,482 )
Taiwan tax holiday benefit     (13,127 )     (13,536 )     (18,556 )
Net change in uncertain tax postions     8,283       (102,100 )     41,400  
Other foreign taxes less incentives and credits     9,658       26,707       10,379  
Other, net     (935 )     (7,296 )     1,128  
Income tax expense   $ 63,265     ($ 7,331 )   $ 104,701

Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

    December 31,     December 25,  
    2011     2010  
Deferred tax assets:                
Product warranty accruals   $ 2,196     $ 1,646  
Allowance for doubtful accounts     12,282       11,572  
Inventory reserves     5,114       5,749  
Sales program allowances     5,591       9,080  
Reserve for sales returns     2,240       2,715  
Other accruals     5,359       5,684  
Unrealized intercompany profit in inventory     15,165       2,792  
Unrealized foreign currency loss     -       266  
Stock option compensation     47,998       40,785  
Tax credit carryforwards, net     33,379       48,784  
Amortization     26,913       28,431  
Deferred revenue     28,905       10,671  
Net operating losses of subsidiaries     17,780       11,583  
Other     4,163       3,750  
Valuation allowance related to loss carryforward and tax credits     (37,173 )     (51,352 )
      169,912       132,156  
Deferred tax liabilities:                
Depreciation     17,600       16,030  
Prepaid expenses     3,328       4,145  
Book basis in excess of tax basis for acquired entities     8,191       6,604  
Unrealized investment gain     910       5,951  
Marketable securities     -       3,038  
Other     469       933  
      30,498       36,701  
Net deferred tax assets   $ 139,414     $ 95,455
Fair Value of Financial Instruments (Tables)
Dec. 31, 2011
Fair Value, by Balance Sheet Grouping
Fair Value, by Balance Sheet Grouping

The carrying amounts and fair values of the Company’s financial instruments are as follows:

 

    December 31, 2011     December 25, 2010  
    Carrying     Fair     Carrying     Fair  
    Amount     Value     Amount     Value