United States

Securities and Exchange Commission

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
   
For the quarterly period ended March 29, 2014

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  
   
For the transition period from              to             

 

Commission file number 0-31983

________________

GARMIN LTD.

(Exact name of Company as specified in its charter)

 

Switzerland 98-0229227
(State or other jurisdiction  (I.R.S. Employer identification no.)
of incorporation or organization)  
Mühlentalstrasse 2 N/A
8200 Schaffhausen  (Zip Code)
Switzerland  
 (Address of principal executive offices)  

 

Company's telephone number, including area code: +41 52 630 1600

 

Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ  NO ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ   NO ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer þ    Accelerated Filer ¨    Non-accelerated Filer ¨   (Do not check if a smaller reporting company)   Smaller reporting company ¨

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨   NO þ

 

Number of shares outstanding of the registrant’s common shares as of April 28, 2014

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

 

 
 

 

Garmin Ltd.

Form 10-Q

Quarter Ended March 29, 2014

 

Table of Contents

 

Page
   
Part I - Financial Information  
     
Item 1. Condensed Consolidated Financial Statements 3
     
  Condensed Consolidated Balance Sheets at March 29, 2014 (Unaudited) and December 28, 2013 3
     
  Condensed Consolidated Statements of Income for the 13-weeks  ended March 29, 2014 and March 30, 2013 (Unaudited) 4
     
  Condensed Consolidated Statements of Comprehensive Income for  the 13-weeks ended March 29, 2014 and March 30, 2013 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the  13-weeks ended March 29, 2014 and March 30, 2013 (Unaudited) 6
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 7
     
Item 2. Management's Discussion and Analysis of  Financial Condition and Results of Operations 15
     
Item 3. Quantitative and Qualitative Disclosures About  Market Risk 22
     
Item 4. Controls and Procedures 23
     
Part II - Other Information  
     
Item 1.      Legal Proceedings 24
     
Item 1A. Risk Factors 29
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 29
     
Item 3. Defaults Upon Senior Securities 29
     
Item 4. Mine Safety Disclosures 29
     
Item 5. Other Information 29
     
Item 6. Exhibits 30
     
Signature Page 31
     
Index to Exhibits 32

 

2
 

 

Part I - Financial Information

Item I - Condensed Consolidated Financial Statements

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except share information

  

   (Unaudited)     
   March 29,   December 28, 
   2014   2013 
Assets          
Current assets:          
Cash and cash equivalents  $1,136,691   $1,179,149 
Marketable securities   163,660    149,862 
Accounts receivable, net   427,457    564,586 
Inventories, net   442,025    382,226 
Deferred income taxes   67,792    69,823 
Deferred costs   52,009    57,368 
Loan receivable   42,862    137,379 
Prepaid expenses and other current assets   54,999    55,243 
Total current assets   2,387,495    2,595,636 
           
Property and equipment, net   417,164    414,848 
           
Marketable securities   1,571,166    1,502,106 
Restricted cash   246    249 
Noncurrent deferred income tax   87,524    88,324 
Noncurrent deferred costs   38,384    41,157 
Other intangible assets, net   216,260    219,494 
Other assets   20,675    17,789 
Total assets  $4,738,914   $4,879,603 
           
Liabilities and Stockholders' Equity          
Current liabilities:          
Accounts payable  $124,241   $146,582 
Salaries and benefits payable   58,166    59,794 
Accrued warranty costs   25,016    26,767 
Accrued sales program costs   31,245    50,903 
Deferred revenue   238,285    256,908 
Accrued royalty costs   7,901    64,538 
Accrued advertising expense   12,643    19,448 
Other accrued expenses   73,911    65,657 
Deferred income taxes   1,974    989 
Income taxes payable   36,009    38,043 
Dividend payable   87,717    175,675 
Total current liabilities   697,108    905,304 
           
Deferred income taxes   1,750    1,758 
Non-current income taxes   141,723    140,933 
Non-current deferred revenue   144,664    171,012 
Other liabilities   1,299    890 
           
Stockholders' equity:   1,797,435    1,797,435 
Shares, CHF 10 par value, 208,077,418 shares authorized and issued; 194,773,186 shares outstanding at March 29, 2014 and 195,150,102 shares outstanding at December 28, 2013          
Additional paid-in capital   80,837    79,263 
Treasury stock   (145,609)   (120,620)
Retained earnings   1,984,405    1,865,587 
Accumulated other comprehensive income   35,302    38,041 
Total stockholders' equity   3,752,370    3,659,706 
Total liabilities and stockholders' equity  $4,738,914   $4,879,603 

 

See accompanying notes.

 

3
 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

 

   13-Weeks Ended 
   March 29,   March 30, 
   2014   2013 
Net sales  $583,221   $531,957 
           
Cost of goods sold   252,387    255,824 
           
Gross profit   330,834    276,133 
           
Advertising expense   24,428    22,249 
Selling, general and administrative expense   89,873    86,269 
Research and development expense   96,164    87,689 
Total operating expense   210,465    196,207 
           
Operating income   120,369    79,926 
           
Other income (expense):          
Interest income   9,768    8,898 
Foreign currency gains (losses)   12,814    (8,348)
Other   (484)   1,158 
Total other income (expense)   22,098    1,708 
           
Income before income taxes   142,467    81,634 
           
Income tax provision (benefit):   23,649    (7,032)
           
Net income  $118,818   $88,666 
           
Net income per share:          
Basic  $0.61   $0.45 
Diluted  $0.61   $0.45 
           
Weighted average common shares outstanding:          
Basic   195,090    195,630 
Diluted   195,860    196,457 

 

See accompanying notes.

 

4
 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

 

   13-Weeks Ended 
   March 29,   March 30, 
   2014   2013 
Net income  $118,818   $88,666 
Translation adjustment   (15,518)   (8,080)
Change in fair value of available-for-sale marketable securities, net of deferred taxes   12,779    (1,119)
Comprehensive income  $116,079   $79,467 

 

See accompanying notes.

 

5
 

 

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

   13-Weeks Ended 
   March 29,   March 30, 
   2014   2013 
Operating Activities:          
Net income  $118,818   $88,666 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   11,672    12,619 
Amortization   6,740    8,271 
(Gain) loss on sale of property and equipment   (617)   36 
Provision for doubtful accounts   (189)   727 
Deferred income taxes   5,942    1,493 
Unrealized foreign currency gains   (15,334)   (495)
Provision for obsolete and slow moving inventories   3,384    6,033 
Stock compensation expense   6,325    5,438 
Realized loss (gain) on marketable securities   1,544    (1,073)
Changes in operating assets and liabilities:          
Accounts receivable   137,198    152,307 
Inventories   (64,083)   (13,608)
Other current and non-current assets   (1,591)   (49,321)
Accounts payable   (20,411)   (18,377)
Other current and non-current liabilities   (80,011)   (100,784)
Deferred revenue   (45,290)   (23,329)
Deferred cost   8,129    4,813 
Income taxes payable   (1,053)   (14,053)
Net cash provided by operating activities   71,173    59,363 
           
Investing activities:          
Purchases of property and equipment   (15,537)   (11,616)
Proceeds from sale of property and equipment   609    12 
Purchase of intangible assets   (1,111)   (347)
Purchase of marketable securities   (298,695)   (258,604)
Redemption of marketable securities   223,786    270,925 
Proceeds from repayment (advances) on loan receivable   94,507    (18,324)
Change in restricted cash   3    (1)
Net cash provided by (used in) investing activities   3,562    (17,955)
           
Financing activities:          
Dividends paid   (87,853)   (175,956)
Purchase of treasury stock under share repurchase plan   (32,986)   - 
Purchase of treasury stock related to equity awards   (58)   (62)
Proceeds from issuance of treasury stock related to equity awards   1,107    1,474 
Tax benefit from issuance of equity awards   2,199    258 
Net cash used in financing activities   (117,591)   (174,286)
           
Effect of exchange rate changes on cash and cash equivalents   398    (4,862)
           
Net decrease in cash and cash equivalents   (42,458)   (137,740)
Cash and cash equivalents at beginning of period   1,179,149    1,231,180 
Cash and cash equivalents at end of period  $1,136,691   $1,093,440 

 

See accompanying notes.

 

6
 

 

Garmin Ltd. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

March 29, 2014

(In thousands, except share and per share information)

 

1.Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week period ended March 29, 2014 are not necessarily indicative of the results that may be expected for the year ending December 27, 2014.

 

The condensed consolidated balance sheet at December 28, 2013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013.

 

The Company’s fiscal year is based on a 52-53 week period ending on the last Saturday of the calendar year. Therefore the financial results of certain fiscal years, and the associated 14-week quarters, will not be exactly comparable to the prior and subsequent 52-week fiscal years and the associated quarters having only 13 weeks. The quarters ended March 29, 2014 and March 30, 2013 both contain operating results for 13 weeks.

 

2.Inventories

 

The components of inventories consist of the following:

 

   March 29, 2014   December 28, 2013 
Raw materials  $163,833   $131,408 
Work-in-process   50,642    50,110 
Finished goods   256,813    229,089 
Inventory reserves   (29,263)   (28,381)
Inventory, net of reserves  $442,025   $382,226 

 

7
 

 

3.Earnings Per Share

 

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

 

 

   13-Weeks Ended 
   March 29,   March 30, 
   2014   2013 
Numerator:          
Numerator for basic and diluted net income  per share - net income  $118,818   $88,666 
           
Denominator:          
Denominator for basic net income per share – weighted-average common shares   195,090    195,630 
           
Effect of dilutive securities – stock options, stock appreciation rights and restricted stock units   770    827 
           
Denominator for diluted net income per share – adjusted weighted-average common shares   195,860    196,457 
           
Basic net income per share  $0.61   $0.45 
           
Diluted net income per share  $0.61   $0.45 

 

There were 4,379,940 and 5,567,166 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended March 29, 2014 and March 30, 2013, respectively.

 

There were 241,784 and 66,718 shares issued as a result of exercises of equity awards for the 13-week periods ended March 29, 2014 and March 30, 2013, respectively.

 

4.Segment Information

 

The Company has identified five operating segments – Auto/Mobile, Aviation, Marine, Outdoor and Fitness. Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker, who allocates resources and assesses performance of each segment individually.

 

Net sales, operating income, and income before taxes for each of the Company’s reportable segments are presented below:

 

   Reportable Segments 
               Auto/         
   Outdoor   Fitness   Marine   Mobile   Aviation   Total 
13-Weeks Ended March 29, 2014                              
                               
Net sales  $83,985   $100,288   $60,002   $242,952   $95,994   $583,221 
Operating income  $23,683   $33,512   $3,810   $30,564   $28,800   $120,369 
Income before taxes  $28,103   $37,522   $6,645   $40,148   $30,049   $142,467 
                               
13-Weeks Ended March 30, 2013                              
                               
Net sales  $76,165   $72,437   $50,296   $252,589   $80,470   $531,957 
Operating income (loss)  $21,588   $19,892   $(2,440)  $20,032   $20,854   $79,926 
Income (loss) before taxes  $22,503   $19,888   $(2,032)  $19,981   $21,294   $81,634 

 

8
 

 

Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.

 

Net sales and property and equipment, net by geographic area are as follows as of and for the 13-week periods ended March 29, 2014 and March 30, 2013. Note that APAC includes Asia Pacific and EMEA includes Europe, the Middle East and Africa:

 

   Americas   APAC   EMEA   Total 
March 29, 2014                    
Net sales to external customers  $304,808   $57,810   $220,603   $583,221 
Property and equipment, net  $243,726   $119,850   $53,588   $417,164 
                     
March 30, 2013                    
Net sales to external customers  $285,813   $55,369   $190,775   $531,957 
Property and equipment, net  $224,049   $130,415   $53,127   $407,591 

 

5.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 expectation of future conditions and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.

 

   13-Weeks Ended 
   March 29,   March 30, 
   2014   2013 
         
Balance - beginning of the period  $26,767   $37,301 
Accrual for products sold   9,485    9,186 
Expenditures   (11,236)   (11,833)
Balance - end of the period  $25,016   $34,654 

 

6.Commitments and Contingencies

 

The Company is party to certain commitments, which includes raw materials, advertising and other indirect purchases in connection with conducting our business. Pursuant to these agreements, the Company is contractually committed to make purchases of approximately $212,691 over the next five years.

 

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

 

9
 

 

On March 14, 2013, the Company entered into a Memorandum of Agreement (the “Agreement”) with Bombardier, Inc. (“Bombardier”).  The Company is the supplier of the avionics system for the Lear 70 and Lear 75 aircraft currently in development for Learjet, Inc., which is a subsidiary of Bombardier (the “Program”).  In order to assist Bombardier in connection with delayed cash flows from the Program partially related to the certification of avionics for the Program exceeding the planned delivery date, the Company agreed to provide Bombardier a short term, interest free, loan of $173,708 in cash in seven installments beginning on March 22, 2013 and ending on September 20, 2013 pursuant to the terms and conditions of the Agreement.  Bombardier will repay the loan in five installments beginning in November 2013 and ending in April 2014 pursuant to the terms and conditions of the Agreement and subsequent amendment signed December 6, 2013.  As of March 29, 2014, the Company had a loan receivable balance of $42,862 from Bombardier in the accompanying consolidated balance sheet, which was collected in full in April 2014.

 

7. Income Taxes

 

The Company’s income tax expense increased by $30,681, to $23,649 for the 13-week period ended March 29, 2014, from ($7,032) for the 13-week period ended March 30, 2013.  The effective tax rate was 16.6% in the first quarter of 2014 compared to (8.6%) in the first quarter of 2013.  The first quarter 2014 effective tax rate increased as compared to first quarter 2013 due to expiration of certain Taiwan tax holidays in 2013, the expiration of the Federal Research & Development Tax Credit on December 31, 2013 and reduced reserve releases.  Release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reduced our expense by $5,795 and $16,536, respectively, in first quarter 2014 and first quarter 2013. Also, contributing to the lower rate in the first quarter 2013 is the impact of $6,301 of research and development tax credits related to 2012 which were recognized when the related legislation was enacted in January 2013. 

 

8. 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 1Unadjusted quoted prices in active markets for identical assets or liability

 

Level 2Observable inputs for the asset or liability, either directly or indirectly, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

 

Level 3Unobservable 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. The valuation methods used by the Company for each significant class of investments are summarized below.

 

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

 

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

 

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

 

10
 

 

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

 

   Fair Value Measurements as 
   of March 29, 2014 
Description  Total   Level 1   Level 2   Level 3 
                 
Mortgage-backed securities  $455,015   $-   $455,015   $- 
Obligations of states and political subdivisions   599,889    -    599,889    - 
Corporate bonds   565,769    -    565,769    - 
Common stocks   30,568    30,568    -    - 
Other   83,585    -    83,585    - 
Total  $1,734,826   $30,568   $1,704,258   $- 

 

   Fair Value Measurements as 
   of December 28, 2013 
Description  Total   Level 1   Level 2   Level 3 
                 
Mortgage-backed securities  $437,330   $-   $437,330   $- 
Obligations of states and political subdivisions   647,354    -    647,354    - 
Corporate bonds   457,148    -    457,148    - 
Common stocks   29,854    29,854    -    - 
Other   80,282    -    80,282    - 
Total  $1,651,968   $29,854   $1,622,114   $- 

 

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

 

   Available-For-Sale Securities as 
   of March 29, 2014 
   Amortized Cost   Gross
Unrealized
Gains
   Gross
Unrealized
Losses-OTTI (1)
   Gross
Unrealized
Losses-Other (2)
   Estimated Fair
Value (Net
Carrying
Amount)
 
Mortgage-backed securities  $468,237   $2,885   $(13,585)  $(2,522)  $455,015 
Obligations of states and political subdivisions   617,971    1,454    (19,417)   (119)   599,889 
U.S. corporate bonds   572,389    1,030    (7,400)   (250)   565,769 
Common stocks   29,203    1,587    (222)   -    30,568 
Other   82,958    687    (60)   -    83,585 
Total  $1,770,758   $7,643   $(40,684)  $(2,891)  $1,734,826 

 

11
 

 

  

Available-For-Sale Securities as

of December 28, 2013

 
   Amortized Cost   Gross
Unrealized
Gains
  

Gross

Unrealized

Losses-OTTI (1)

  

Gross

Unrealized

Losses-Other (2)

   Estimated Fair
Value (Net
Carrying
Amount)
 
Mortgage-backed securities  $461,054   $2,692   $(22,614)  $(3,802)  $437,330 
Obligations of states and political subdivisions   673,529    1,601    (27,509)   (267)   647,354 
U.S. corporate bonds   463,437    1,050    (7,031)   (308)   457,148 
Common stocks   24,540    5,413    (99)   —      29,854 
Other   78,059    2,326    (103)   —      80,282 
Total  $1,700,619   $13,082   $(57,356)  $(4,377)  $1,651,968 

 

(1) Represents impairment not related to credit for those investment securities that have been determined to be other-than-temporarily impaired.

(2) Represents unrealized losses on investment securities that have not been determined to be other-than-temporarily impaired.

 

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. The Company recognizes the credit component of other-than-temporary impairments of debt securities in "Other Income" and the noncredit component in "Other comprehensive income (loss)" for those securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell before recovery. During 2013 and the first quarter of 2014, the Company did not record any material impairment charges on its outstanding securities.

 

The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors.   In 2013, the Company experienced unrealized, non-cash losses on its investment portfolio resulting in a balance of $57,356 and $4,377 of gross other-than-temporary impairment and other unrealized losses on marketable securities at December 28, 2013.  The amortized cost and estimated fair value of the securities at an unrealized loss position at December 28, 2013 were $1,215,498 and $1,153,765, respectively.  This decrease in estimated fair value was primarily due to market valuations on mortgage-backed securities and obligations of states and political subdivisions declining.  The decline was due to increases in the 10 Year Treasury Bond Yield during 2013, which caused market valuations of securities in our investment portfolios to decline.  

 

The 10 Year Treasury Bond Yield has decreased in 2014, resulting in a balance of $40,684 and $2,891 of gross other-than-temporary impairment and other unrealized losses on marketable securities at March 29, 2014.  The amortized cost and estimated fair value of the securities at an unrealized loss position at March 29, 2014 were $1,231,505 and $1,187,930, respectively.   Approximately 46% of securities in our portfolio were at an unrealized loss position at March 29, 2014.  An immaterial amount of unrealized losses relate to securities that have been in a continuous unrealized loss position for 12 months or longer. We have the ability to hold these securities until maturity or their value is recovered. We do not consider these unrealized losses to be other than temporary credit losses because there has been no deterioration in credit quality and no change in the cash flows of the underlying securities. We do not intend to sell the securities and it is not more likely than not that we will be required to sell the securities; therefore, no impairment has been recorded in the accompanying condensed consolidated statement of income.

 

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

 

The amortized cost and estimated fair value of marketable securities at March 29, 2014, 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.

 

12
 

 

       Estimated 
   Cost   Fair Value 
Due in one year or less  $164,940   $163,660 
Due after one year through five years   763,230    759,414 
Due after five years through ten years   240,920    233,601 
Due after ten years   534,829    509,308 
Other (No contractual maturity dates)   66,839    68,843 
   $1,770,758   $1,734,826 

 

9. Share Repurchase Plan

 

On February 15, 2013, the Board of Directors approved a share repurchase program authorizing the Company to purchase up to $300,000 of its common shares.  A Rule 10b5-1 plan was adopted and allows the repurchase of its shares at times when it otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods.  The share repurchase authorization expires on December 31, 2014.  As of March 29, 2014, the Company the Company had repurchased 1,995,200 shares using cash of $91,526.  There remains approximately $208,474 available to repurchase additional shares under this authorization.

 

10. Accumulated Other Comprehensive Income

 

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week period ended March 29, 2014:

 

   Foreign Currency
Translation
Adjustment
   Unrealized Gains
(Losses) on
Available for Sale
Securities
   Total 
Balance - beginning of period  $85,363   $(47,322)  $38,041 
Other comprehensive income before reclassification   (15,518)   13,927    (1,591)
Amounts reclassified from accumulated other comprehensive income   -    (1,148)   (1,148)
Net current-period other comprehensive income   (15,518)   12,779    (2,739)
Balance - end of period  $69,845   $(34,543)  $35,302 

 

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week period ended March 29, 2014:

 

Details about Accumulated Other
Comprehensive Income Components
  Amount Reclassified
from Accumulated
Other Comprehensive
Income
   Affected Line Item in the
Statement Where Net Income is
Presented
        
Unrealized gains (losses) on available-for-sale securities  $1,544   Other income (expense)
    (396)  Income tax provision
   $1,148   Net of tax

 

13
 

 

11. Recently Issued Accounting Pronouncements

 

In July 2013, the FASB issued Accounting Standards Update No. 2013-11 “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists” (ASU 2013-11), which is included in ASC Topic 740 (Income Taxes). ASU 2013-11 requires an entity to net its liability for unrecognized tax positions against a net operating loss carryforward, a similar tax loss or a tax credit carryforward when settlement in this manner is available under the tax law. The provisions of this new guidance are effective for reporting periods beginning after December 15, 2013. The implementation of the amended accounting guidance did not have a material impact on the Company’s financial statements.

 

12. Subsequent events

 

No significant events occurred subsequent to the balance sheet date but prior to April 30, 2014 that would have a material impact on the financial statements.

 

14
 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by our management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of our assumptions prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's web site on the World Wide Web at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.

 

The information contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 28, 2013.

 

The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five business segments, the outdoor, fitness, marine, automotive/mobile and aviation markets. Our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.

 

15
 

 

Results of Operations

 

The following table sets forth our results of operations as a percentage of net sales during the periods shown:

 

   13-Weeks Ended 
   March 29, 2014   March 30, 2013 
         
Net sales   100%   100%
Cost of goods sold   43%   48%
Gross profit   57%   52%
Advertising   4%   4%
Selling, general and administrative   15%   16%
Research and development   16%   17%
Total operating expenses   35%   37%
Operating income   21%   15%
Other income (expense), net   3%   0%
Income before income taxes   24%   15%
Provision/(benefit) for income taxes   4%   -2%
Net income   20%   17%

 

The Company manages its operations in five segments: outdoor, fitness, marine, automotive/mobile, and aviation, and each of its segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The following table sets forth our results of operations (in thousands) including revenue (net sales), operating income, and income before taxes for each of our five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, automotive/mobile, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.

 

Garmin Ltd. And Subsidiaries
Net Sales, Operating Income (Loss) and Income (Loss) before Taxes by Segment (Unaudited)

 

   Reportable Segments 
   Outdoor   Fitness   Marine   Auto/
Mobile
   Aviation   Total 
 
13-Weeks Ended March 29, 2014
                               
Net sales  $83,985   $100,288   $60,002   $242,952   $95,994   $583,221 
Operating income  $23,683   $33,512   $3,810   $30,564   $28,800   $120,369 
Income before taxes  $28,103   $37,522   $6,645   $40,148   $30,049   $142,467 
 
13-Weeks Ended March 30, 2013
                               
Net sales  $76,165   $72,437   $50,296   $252,589   $80,470   $531,957 
Operating income (loss)  $21,588   $19,892   $(2,440)  $20,032   $20,854   $79,926 
Income (loss) before taxes  $22,503   $19,888   $(2,032)  $19,981   $21,294   $81,634 

 

16
 

 

Comparison of 13-Weeks Ended March 29, 2014 and March 30, 2013

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

 

Net Sales

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013   Year over Year 
   Net Sales   % of Revenues   Net Sales   % of Revenues   $ Change   % Change 
Outdoor  $83,985    14%  $76,165    14%  $7,820    10%
Fitness   100,288    17%   72,437    13%   27,851    38%
Marine   60,002    10%   50,296    10%   9,706    19%
Automotive/Mobile   242,952    42%   252,589    48%   (9,637)   -4%
Aviation   95,994    17%   80,470    15%   15,524    19%
Total  $583,221    100%  $531,957    100%  $51,264    10%

 

Net sales increased 10% for the 13-week period ended March 29, 2014 when compared to the year-ago quarter. All segments, excluding automotive/mobile, grew in the quarter. Automotive/mobile revenue remains the largest portion of our revenue mix at 42% in the first quarter of 2014 compared to 48% in the first quarter of 2013.

 

Total unit sales were flat at 2,492 in the first quarter of 2014 from 2,491 in the same period of 2013. Unit sales volume in the first quarter of fiscal 2014 grew in fitness, aviation, automotive OEM and outdoor with offsetting declines in PND and marine.

 

Automotive/mobile segment revenue decreased 4% from the year-ago quarter, as volumes decreased 12% partially offset by average selling price (ASP) improvement primarily due to the amortization of previously deferred revenue exceeding current period revenue deferrals in the first quarter of 2014. Revenues in our fitness segment increased 38% from the year-ago quarter on the strength of recent running product introductions and vívofit™, our first fitness band. Revenues in our marine segment increased 19% as new products, which garner higher ASPs, led to improved demand and market share gains. Aviation revenues increased 19% from the year-ago quarter as OEM market share gains and aftermarket products contributed. Outdoor revenues increased 10% from the year-ago quarter with contributions from all major product categories and ASP improvement.

 

Cost of Goods Sold

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013   Year over Year 
   Cost of Goods   % of Revenues   Cost of Goods   % of Revenues   $ Change   % Change 
Outdoor  $33,075    39%  $31,690    42%  $1,385    4%
Fitness   36,203    36%   27,469    38%   8,734    32%
Marine   28,949    48%   26,949    54%   2,000    7%
Automotive/Mobile   129,161    53%   145,469    58%   (16,308)   -11%
Aviation   24,999    26%   24,247    30%   752    3%
Total  $252,387    43%  $255,824    48%  $(3,437)   -1%

 

Cost of goods sold decreased 1% in absolute dollars for the 13-week period ended March 29, 2014 when compared to the year ago quarter. The decrease was driven by the automotive/mobile segment which recorded a cost of goods as a percentage of revenues decrease of 440 basis points primarily due to benefit from the amortization of previously deferred revenue and costs exceeding new deferrals on current period sales in the first quarter of 2014.

 

As a percentage of revenue, cost of goods sold decreased 480 basis points from the year ago quarter with improvement in each segment. This margin improvement was primarily related to product mix shifting toward new products in marine, outdoor and fitness. In addition, ASP improvement also contributed in marine and outdoor. Aviation margin improvement was primarily due to increased software sales.

 

17
 

 

Gross Profit

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013   Year over Year 
   Gross Profit   % of Revenues   Gross Profit   % of Revenues   $ Change   % Change 
Outdoor  $50,910    61%  $44,475    58%  $6,435    14%
Fitness   64,085    64%   44,968    62%   19,117    43%
Marine   31,053    52%   23,347    46%   7,706    33%
Automotive/Mobile   113,791    47%   107,120    42%   6,671    6%
Aviation   70,995    74%   56,223    70%   14,772    26%
Total  $330,834    57%  $276,133    52%  $54,701    20%

 

Gross profit dollars in the first quarter of 2014 increased 20% while gross profit margin increased 480 basis points compared to the first quarter of 2013 with all segments improving. The automotive/mobile gross margin improved to 47% driven by the amortization of previously deferred high margin revenues, as discussed above. Each of the remaining segments also recorded improved gross margins, as discussed above.

 

Advertising Expense

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013     
   Advertising       Advertising       Year over Year 
   Expense   % of Revenues   Expense   % of Revenues   $ Change     % Change 
Outdoor  $5,176    6%  $3,111    4%  $2,065    66%
Fitness   5,868    6%   5,640    8%   228    4%
Marine   4,163    7%   3,053    6%   1,110    36%
Automotive/Mobile   7,406    3%   9,209    4%   (1,803)   -20%
Aviation   1,815    2%   1,236    2%   579    47%
Total  $24,428    4%  $22,249    4%  $2,179    10%

 

Advertising expense increased 10% in absolute dollars while holding steady as a percent of revenues. The increase in absolute dollars occurred primarily in outdoor and marine to support new product introductions and was partially offset by decreased spending in automotive/mobile due to reduced cooperative advertising associated with lower volumes.

 

Selling, General and Administrative Expense

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013     
   Selling, General &       Selling, General &       Year over Year 
   Admin. Expenses   % of Revenues   Admin. Expenses   % of Revenues   $ Change   % Change 
Outdoor  $14,744    18%  $13,891    18%  $853    6%
Fitness   16,082    16%   12,826    18%   3,256    25%
Marine   11,782    20%   10,909    22%   873    8%
Automotive/Mobile   41,548    17%   43,521    17%   (1,973)   -5%
Aviation   5,717    6%   5,122    6%   595    12%
Total  $89,873    15%  $86,269    16%  $3,604    4%

 

Selling, general and administrative expense increased 4% in absolute dollars and declined 80 basis points as a percent of revenues compared to the year-ago quarter. The absolute dollar increase is primarily related to legal fees and occupancy costs. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues.

 

18
 

 

Research and Development Expense

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013     
   Research &       Research &       Year over Year 
   Development   % of Revenues   Development   % of Revenues   $ Change   % Change 
Outdoor  $7,307    9%  $5,885    8%  $1,422    24%
Fitness   8,623    9%   6,610    9%   2,013    30%
Marine   11,298    19%   11,825    24%   (527)   -4%
Automotive/Mobile   34,273    14%   34,358    14%   (85)   0%
Aviation   34,663    36%   29,011    36%   5,652    19%
Total  $96,164    16%  $87,689    16%  $8,475    10%

 

Research and development expense increased 10% due to ongoing development activities for new products and the addition of over 100 new engineering personnel to our staff since the year-ago quarter. In absolute dollars, research and development costs increased $8.5 million when compared with the year-ago quarter but remained flat as a percent of revenue. Aviation, fitness and outdoor increased to support new product initiatives while marine and automotive/mobile declined.

 

Operating Income

 

   13-weeks ended March 29, 2014   13-weeks ended March 30, 2013   Year over Year 
   Operating Income   % of Revenues   Operating Income   % of Revenues   $ Change   % Change 
Outdoor  $23,683    28%  $21,588    28%  $2,095    10%
Fitness   33,512    33%   19,892    27%   13,620    68%
Marine   3,810    6%   (2,440)   -5%   6,250    NM 
Automotive/Mobile   30,564    13%   20,032    8%   10,532    53%
Aviation   28,800    30%   20,854    26%   7,946    38%
Total  $120,369    21%  $79,926    15%  $40,443    51%

 

NM = not meaningful

 

Operating income increased 51% in absolute dollars and 560 basis points as a percent of revenue when compared to the first quarter of 2013. Revenue growth, an improving gross margin percentage and reduced selling, general and administrative as a percentage of revenue, as discussed above, contributed to the growth.

 

Other Income (Expense)

 

   13-weeks ended
March 29, 2014
   13-weeks ended
March 30, 2013
 
Interest Income  $9,768   $8,898 
Foreign Currency Exchange   12,814    (8,348)
Other   (484)   1,158 
Total  $22,098   $1,708 

 

The average return on cash and investments during the first quarter of 2014 was 1.2% compared to 1.5% during the same quarter of 2013. The increase in interest income is attributable to a higher cash balance offset by a declining interest rate.

 

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation. The U.S. Dollar remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most European subsidiaries. As these entities have grown, currency fluctuations can generate material gains and losses. Additionally, Euro-based inter-company transactions can also generate currency gains and losses. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

 

19
 

 

The majority of the $12.8 million currency gain in the first quarter of 2014 was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar. During the first quarter of 2014, the U.S. Dollar strengthened 1.4% compared to the Taiwan Dollar resulting in a gain of $13.4 million. The remaining net currency loss of $0.6 million is related to other currencies and timing of transactions.

 

The majority of the $8.3 million currency loss in the first quarter of 2013 was due to the strengthening of the U.S. Dollar compared to the Euro and British Pound Sterling. The strengthening of the U.S. Dollar compared to the Taiwan Dollar contributed a partially offsetting gain. The movements of the Taiwan Dollar and Euro/British Pound Sterling have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs and cash held in non-functional currency while the Euro and British Pound Sterling transactions relate to revenue. During the first quarter of 2013, the U.S. Dollar strengthened 3.1% and 5.7% compared to the Euro and the British Pound Sterling, respectively, resulting in a loss of $10.6 million. In addition, the U.S. Dollar strengthened 0.3% against the Taiwan Dollar, resulting in a $3.3 million gain. The remaining net currency loss of $1.0 million is related to other currencies and timing of transactions.

 

Income Tax Provision

 

Our income tax expense increased by $30.7 million, to $23.6 million for the 13-week period ended March 29, 2014, from ($7.0) million for the 13-week period ended March 30, 2013.  The effective tax rate was 16.6% in the first quarter of 2014 compared to (8.6%) in the first quarter of 2013.  The first quarter 2014 effective tax rate increased as compared to first quarter 2013 due to expiration of certain Taiwan tax holidays in 2013, the expiration of the Federal Research & Development Tax Credit on December 31, 2013 and reduced reserve releases.  Release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits reduced our expense by $5.8 million and $16.5 million, respectively, in first quarter 2014 and first quarter 2013. Also, contributing to the lower rate in the first quarter 2013 is the impact of $6.3 million of research and development tax credits related to 2012 which were recognized when the related legislation was enacted in January 2013. 

 

Net Income

 

As a result of the above, net income increased 34% for the 13-week period ended March 29, 2014 to $118.8 million compared to $88.7 million for the 13-week period ended March 30, 2013.

 

Liquidity and Capital Resources

 

Operating Activities

 

   13-Weeks Ended 
   March 29,   March 30, 
(In thousands)  2014   2013 
Net cash provided by operating activities  $71,173   $59,363 

 

The $11.8 million increase in cash provided by operating activities in first quarter 2014 compared to first quarter 2013 was primarily due to the following:

 

·other current and noncurrent assets providing $47.7 million more cash primarily due to a $41 million tax-related prepayment made in first quarter of 2013 that was subsequently recovered in the second quarter of 2013
·net income increasing by $30.2 million as discussed in the Results of Operations section above
·other current and non-current liabilities providing $20.8 million more cash due to lower 2013 royalty costs on decreased revenues and the timing of such payments and
·income taxes payable providing $13.0 million more cash due to the timing of disbursements

 

20
 

 

Partially offset by:

 

·inventories providing $50.5 million less cash due primarily to new product categories and increasing product demand
·deferred revenue/costs providing $18.6 million less working capital benefit due to the increased amortization of previously deferred revenue/cost as discussed in the Results of Operations section above
·accounts receivable providing $15.1 million less cash primarily due to lower revenue in fourth quarter 2013 and
·the impact of increasing unrealized foreign currency gains providing $14.8 million less cash due primarily to foreign currency rate fluctuations related to our Taiwan operations which utilize the Taiwan Dollar as their functional currency resulting in translation of assets and liabilities to U.S. Dollar

 

Investing Activities

   13-Weeks Ended 
   March 29,   March 30, 
(In thousands)  2014   2013 
Net cash provided by (used in) investing activities  $3,562   $(17,955)

 

The $21.5 million increase in cash provided by investing activities in first quarter 2014 compared to first quarter 2013 was primarily due to the following:

 

·collection of cash advanced under a loan receivable commitment with Bombardier of $94.5 million

 

Partially offset by:

 

·increased net investments in marketable securities of $87.2 million

 

It is management’s goal to invest the on-hand cash consistent with Garmin’s investment policy, which has been approved by the Board of Directors. The investment policy’s primary purpose is to preserve capital, maintain an acceptable degree of liquidity, and maximize yield within the constraint of low credit risk. Garmin’s average interest rate returns on cash and investments during first quarter 2014 and 2013 were approximately 1.2% and 1.5%, respectively.

 

Financing Activities

 

   13-Weeks Ended 
   March 29,   March 30, 
(In thousands)  2014   2013 
Net cash used in financing activities  $(117,591)  $(174,286)

 

The $56.7 million decrease in cash used in financing activities in first quarter 2014 compared to first quarter 2013 was primarily due to the following:

 

·decreased dividend payments of $88.1 million due to the timing of our calendar fourth quarter 2012 dividend occurring in our fiscal first quarter 2013

 

Partially offset by:

 

·increased purchase of treasury stock of $33.0 million under a share repurchase authorization

 

We currently use cash flow from operations to fund our capital expenditures, to support our working capital requirements, and to pay dividends. We expect that future cash requirements will principally be for capital expenditures, working capital, payment of dividends declared, share repurchases and the funding of strategic acquisitions. We believe that our existing cash balances and cash flow from operations will be sufficient to meet our long-term projected capital expenditures, working capital and other cash requirements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

21
 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market Sensitivity

 

We have market risk primarily in connection with the pricing of our products and services and the purchase of raw materials. Product pricing and raw material costs are both significantly influenced by semiconductor market conditions. Historically, during cyclical economic downturns, we have been able to offset pricing declines for our products through a combination of improved product mix and success in obtaining price reductions in raw material costs.

 

Inflation

 

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

 

Foreign Currency Exchange Rate Risk

 

The operation of the Company’s subsidiaries in international markets results in exposure to movements in currency exchange rates. The potential of volatile foreign exchange rate fluctuations in the future could have a significant effect on our results of operations. In accordance with the Accounting Standards Code, the financial statements of all Company entities with functional currencies that are not United States dollars (USD) are translated for consolidation purposes into USD, the reporting currency of Garmin Ltd. Sales, costs, and expenses are translated at rates prevailing during the reporting periods and at end-of-period rates for all assets and liabilities. The effect of this translation is recorded in a separate component of stockholders’ equity and have been included in accumulated other comprehensive income/(loss) in the accompanying condensed consolidated balance sheets and condensed consolidated statements of comprehensive income.

 

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar (TD), the Euro, and the British Pound Sterling. The USD remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most European subsidiaries, and as a result, Euro currency movement may generate material gains and losses. Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses. Due to the relative size of entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations within these entities are not expected to have a material impact on the Company’s financial statements.

 

Interest Rate Risk

 

As of March 29, 2014, we are exposed to interest rate risk in connection with our investments in marketable securities. As interest rates change, the unrealized gains and losses associated with those securities will fluctuate accordingly. As we have no outstanding long term debt, we have no meaningful debt-related interest rate risk.

 

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Item 4. Controls and Procedures

 

(a)  Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of March 29, 2014, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 29, 2014 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended March 29, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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Part II - Other Information

 

Item 1. Legal Proceedings

 

American Vehicular Sciences LLC, v. Garmin International, Inc., Garmin USA, Inc., and Garmin Ltd.

 

On March 7, 2014, American Vehicular Sciences LLC (AVS) filed suit in the United States District Court for the Eastern District of Texas against Garmin International, Inc, Garmin USA, Inc., and Garmin Ltd. (collectively “Garmin”), alleging infringement of U.S. Patent No. 8,630,795 (the “‘795 patent”). On April 9, 2014, Garmin filed its answer asserting that each asserted claim of the ‘795 patent is invalid and/or not infringed. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. v. Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc.

 

On September 23, 2013 Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. filed suit in the United States District Court for the District of Oregon against Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 6,084,565 (“the ‘565 patent”), 6,424,292 (“the ‘292 patent”), 7,161,561 (“the ‘561 patent”), and 7,768,447 (“the ‘447 patent”). On October 22, 2013, Garmin filed its answer asserting that each asserted claim of the ‘565 patent, the ‘292 patent, the ’561 patent, and the ‘447 patent is invalid and/or not infringed. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Harbinger Capital Partners LLC et al v. Deere & Company et al; LightSquared Inc. et al. v. Deere & Company et al.

 

               On August 9, 2013, Harbinger Capital Partners LLC and ten related entities filed a lawsuit (the “Harbinger Lawsuit”) in the United States District Court for the Southern District of New York against Deere & Company (“Deere”), Garmin International, Inc. (“Garmin”), Trimble Navigation Ltd. (“Trimble”), The U.S. GPS Industry Council (the “Council”), and the Coalition to Save Our GPS. The Coalition to Save Our GPS is no longer a defendant. Plaintiffs filed a first amended complaint on August 16, 2013, a second amended complaint on January 21, 2014, and a third amended complaint on March 18, 2014. The third amended complaint seeks damages of at least $1.9 billion based on allegations of violation of Rule 10b5-1 of the Securities Exchange Act of 1934 (the “1934 Act”), violation of Section 20(a) of the 1934 Act, fraud, negligent misrepresentation, constructive fraud, equitable estoppel, breach of contract, and violation of Section 349 of the New York General Business Law. Plaintiffs allege that they invested in a company now called LightSquared in the belief that LightSquared would be able to operate a new terrestrial, mobile telecommunications network (the “Terrestrial Plan”) on certain satellite radio frequencies. Plaintiffs also allege that LightSquared was not able to obtain approval from the Federal Communications Commission (FCC) to operate the proposed Terrestrial Plan because of interference it would cause to Global Positioning System (GPS) receivers operating in an adjacent frequency band. Plaintiffs further allege that defendants concealed the likelihood of such interference and breached an earlier alleged agreement with a predecessor of LightSquared regarding a different technical issue. Plaintiffs allege they were third-party beneficiaries of the agreement.

 

On November 1, 2013, LightSquared, Inc. and two related entities (collectively, “LightSquared”) filed an adversary proceeding (the “LightSquared Lawsuit”) in the United States Bankruptcy Court for the Southern District of New York (where a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code filed by LightSquared and certain related entities is pending) against Deere, Garmin, Trimble, the Council, and the Coalition to Save Our GPS. LightSquared filed a first amended complaint on March 18, 2014. LightSquared’s amended complaint seeks damages based on claims of promissory estoppel, quantum meruit, breach of contract, breach of implied covenant of good faith, unjust enrichment, negligent misrepresentation, constructive fraud, civil conspiracy, and tortious interference with contractual or business relationships. Like the allegations in the Harbinger Lawsuit, LightSquared alleges that it was not able to obtain approval from the FCC to operate its proposed Terrestrial Plan because of interference it would cause to GPS receivers. LightSquared also alleges that the inability to obtain FCC approval caused LightSquared damages, including the loss of third-party contracts.  LightSquared further alleges that defendants concealed the likelihood of such interference and/or represented to LightSquared that any interference issues had been resolved and that defendants breached earlier alleged agreements with LightSquared regarding a different technical issue. On November 15, 2013, Garmin, Deere, Trimble, and the Council filed a motion to withdraw the reference of the LightSquared adversary proceeding from the Bankruptcy Court to the United States District Court for the Southern District of New York (the “District Court”). On January 31, 2014 the District Court granted the defendants’ motion to withdraw the reference.

 

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The defendants intend to file a motion to dismiss both the Harbinger and LightSquared Lawsuits in late May 2014. Although there can be no assurance that an unfavorable outcome of the Harbinger and LightSquared Lawsuits would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in the Harbinger and LightSquared Lawsuits are without merit and intends to vigorously defend these actions.

 

ICON Health & Fitness, Inc. v. Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc.

 

On November 18, 2011, ICON Health & Fitness, Inc. filed suit in the United States District Court for the District of Utah against Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 7,789,800 (the ‘800 patent”) and 6,701,271 (“the ‘271 patent”). On June 8, 2012, ICON filed an amended complaint alleging infringement of U.S. Patent Nos. 6,626,799 and 6,921,351. On June 25, 2012, Garmin filed its answer asserting that each asserted claim of these additional patents-in-suit is invalid and/or not infringed. On April 11, 2013, the Court dismissed ICON’s allegations of infringement of the ‘800 and ‘271 patents against Garmin without prejudice pursuant to a motion filed by ICON. On April 25, 2014, the parties finalized a settlement agreement resolving this matter.

 

Innovative Display Technologies LLC. v. Garmin International, Inc., and Garmin Ltd.

 

On February 26, 2014, Innovative Display Technologies LLC. (IDT) filed suit in the United States District Court for the Eastern District of Texas against Garmin International, Inc., and Garmin Ltd. (collectively “Garmin”) alleging infringement of U.S. Patent Nos. 7,300,194, 7,384,177, 7,404,660, 7,434,974, 8,215,816, 7,160,015, 7,736,043, 8,142,063, and 6,079,838 (collectively the “Asserted Patents.”) On March 24, 2014, Garmin filed its answer asserting that each asserted claim of the Asserted Patents is invalid and/or not infringed. On April 25, 2014, the parties finalized a settlement agreement resolving this matter.

 

In the Matter of Certain Navigation Products, Including GPS Devices, Navigation and Display Systems, Radar Systems, Navigational Aids, Mapping Systems and Related Software

 

On September 23, 2013, Furuno Electric Co., Ltd. and Furuno U.S.A., Inc. filed a complaint with the United States International Trade Commission against several companies, including Garmin Ltd., Garmin International, Inc., Garmin North America, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin and the other respondents of U.S. Patent Nos. 6,084,565 (“the ‘565 patent”), 6,424,292 (“the ‘292 patent”), 7,161,561 (“the ‘561 patent”), and 7,768,447 (“the ‘447 patent”). On December 3, 2013, Garmin filed its response asserting that each asserted claim of the ‘565 patent, the ‘292 patent, the ‘561 patent, and the ‘447 patent is invalid and/or not infringed. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

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In the Matter of Certain Wireless Consumer Electronics Devices and Components Thereof

 

On July 24, 2012, Technology Properties Limited LLC, Phoenix Digital Solutions LLC, and Patriot Scientific Corporation filed a complaint with the United States International Trade Commission against 24 companies, including Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging a violation of Section 337 of the Tariff Act of 1930, as amended, through alleged infringement by Garmin and the other respondents of U.S. Patent No. 5,809,336 (“the ‘336 patent”). On August 21, 2012 the ITC instituted an investigation under Section 337 of the Tariff Act pursuant to this complaint. On September 6, 2013, the ITC administrative law judge issued an Initial Determination finding that there was no violation of Section 337 by any Garmin company. On February 19, 2014, the ITC issued a Final Determination affirming the finding of no violation by the administrative law judge. The Final Determination is subject to appeal to the Court of Appeals for the Federal Circuit. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Andrea Katz, on behalf of herself and all others similarly situated, v. Garmin Ltd. and Garmin International, Inc.

 

On December 18, 2013, a purported class action lawsuit was filed against Garmin International, Inc. and Garmin Ltd. in the U.S. District Court for the Northern District of Illinois. The lead plaintiff was Andrea Katz, on behalf of herself and all others similarly situated. The class of plaintiffs that Andrea Katz purported to represent includes all individuals who purchased any model of Forerunner watch in the State of Illinois and the United States. Plaintiff asserted claims for breach of contract, breach of express warranty, breach of implied warranties, negligence, negligent misrepresentation, and violations of Illinois statutory law. Plaintiff alleged that Forerunner watch bands have an unacceptable rate of failure in that they detach from the watch. Plaintiff sought compensatory and punitive damages, prejudgment interest, costs, and attorneys’ fees, and injunctive relief. On January 29, 2014 the court dismissed the lawsuit without prejudice. On January 30, 2014, the plaintiff re-filed the lawsuit with the same claims for relief as the earlier action and adding an additional claim for unjust enrichment. Garmin believes that plaintiff Andrea Katz’s claims were mooted prior to the lawsuit being re-filed. On February 4, 2014, the court ordered the case to be transferred to the United States District Court for the District of Utah. Garmin sought reconsideration of that order. On February 13, 2014, the court ordered the parties to brief a dispositive motion concerning whether Andrea Katz had legal standing at the time she filed her second action. After Garmin filed a motion to dismiss, Andrea Katz voluntarily dismissed the litigation. On March 6, 2014, she refiled the lawsuit in the District Court for the District of Utah with the same claims, but with additional claims for violations of the Utah Consumers Sales Practice Act, Lanham Act, and Utah Truth in Advertising Act.  The relief she requests is the same. On March 31, 2014, Garmin filed a motion to transfer the Utah action back to the Northern District of Illinois. On April 17, 2014 the plaintiff filed an opposition to the motion to transfer. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Brian Meyers, on behalf of himself and all others similarly situated, v. Garmin International, Inc. Garmin USA, Inc. and Garmin Ltd.

 

On August 13, 2013, Brian Meyers filed a putative class action complaint against Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd. in the United States District Court for the District of Kansas. Meyers alleges that lithium-ion batteries in certain Garmin products are defective and alleges violations of the Kansas Consumer Protection Act, breach of an implied warranty of merchantability, breach of contract, unjust enrichment, breach of express warranty and also requests declaratory relief that the batteries are defective and must be covered by Garmin’s warranties. The complaint seeks an order for class certification, a declaration that the batteries are defective, an order of injunctive relief, payment of damages in an unspecified amount on behalf of a putative class of all purchasers of certain Garmin products, and an award of attorneys’ fees. On September 18, 2013 the plaintiff voluntarily dismissed Garmin Ltd. as a defendant without prejudice. On October 18, 2013 the plaintiff filed an amended class action complaint. On November 1, 2013 the remaining Garmin defendants filed a motion to dismiss all counts of the complaint for failure to state a claim on which relief can be granted. On January 24, 2014, the Court granted the motion to dismiss in part and denied it in part, dismissing the count for declaratory relief and the prayer for a declaration that the batteries are defective, but allowing the case to proceed on other substantive counts. No class has been certified at this time. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

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MSPBO, LLC v. Garmin International, Inc.

 

On December 16, 2013, MSPBO, LLC filed suit in the United States District Court for the District of Colorado against Garmin International, Inc. alleging infringement of U.S. Patent No. 6,744,375. On January 9, 2014, Garmin filed a motion to dismiss the complaint alleging that the claims are subject to arbitration pending in Kansas and alternatively asked the District of Colorado to stay the suit until the arbitration in Kansas is resolved. Garmin filed a petition on January 8, 2014 with the District Court of Johnson County, Kansas to compel arbitration with Phatrat Technology, Inc. and Phatrat Technology, LLC, alleging Garmin’s prior license agreement with Phatrat covers MSPBO’s current claims as MSPBO is an affiliate of Phatrat under the license agreement with Garmin. On April 28, 2014, the District Court of Johnson County, Kansas granted Garmin’s motion to compel arbitration. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Pacing Technologies, LLC v. Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd.

 

On May 1, 2012, Pacing Technologies, LLC filed suit in the United States District Court for the Southern District of California against Garmin International, Inc., Garmin USA, Inc. and Garmin Ltd alleging infringement of U.S. Patent No. 8,101,843. On July 6, 2012, Garmin filed its answer asserting that each asserted claim of the patent-in-suit is invalid and/or not infringed. The court held a hearing on claim construction on June 27, 2013. On October 15, 2013 the court issued a claim construction order. On March 11, 2014, the court granted Garmin’s motion for summary judgment of non-infringement and found that Garmin’s products could not infringe Pacing’s patent as a matter of law. Pacing Technologies LLC has appealed the court’s summary judgment order to the Court of Appeals for the Federal Circuit. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Silver State Intellectual Technologies, Inc. v. Garmin International, Inc. and Garmin USA, Inc.

 

On September 29, 2011, Silver State Intellectual Technologies, Inc. filed suit in the United States District Court for the District of Nevada against Garmin International, Inc. and Garmin USA, Inc. (collectively “Garmin”), alleging infringement of U.S. Patent Nos. 6,525,768; 6,529,824; 6,542,812; 7,343,165; 7,522,992; 7,593,812; 7,650,234; 7,702,455 and 7,739,039. On December 8, 2011, Garmin filed its answer asserting that each asserted claim of the patents-in-suit is invalid and/or not infringed. On April 5, 2013, the Court held a claim construction hearing and on August 15, 2013 the Court issued an order construing the clams of the patents in suit. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

Technology Properties Limited, LLC et al v. Garmin Ltd., Garmin International, Inc. and Garmin USA, Inc.

 

On July 24, 2012 Technology Properties Limited LLC, Phoenix Digital Solutions LLC, and Patriot Scientific Corporation filed suit in the U.S. District Court for the Northern District of California against Garmin Ltd., Garmin International, Inc., and Garmin USA, Inc. (collectively “Garmin”) alleging infringement by Garmin of one or more of the following patents: U.S. Patent No. 5,809,336, U.S. Patent 5,440,749 and U.S. Patent No. 5,530,890. By agreement of the parties, on October 29, 2012 this lawsuit was stayed pending the resolution of the investigation by the International Trade Commission in In the Matter of Certain Wireless Consumer Electronics Devices and Components Thereof which is described above. On March 21, 2012, Technology Properties Limited LLC filed a petition for reorganization under Chapter 11 of the federal bankruptcy laws. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity, or financial position, Garmin believes that the claims in this action are without merit and intends to vigorously defend this action.

 

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Visteon Global Technologies, Inc. and Visteon Technologies LLC v. Garmin International, Inc.

 

On February 10, 2010, Visteon Global Technologies, Inc. and Visteon Technologies LLC filed suit in the United States District Court for the Eastern District of Michigan, Southern Division, against Garmin International, Inc. alleging infringement of U.S. Patent No. 5,544,060 (“the ‘060 patent”), U.S. Patent No. 5,654,892 (“the ‘892 patent”), U.S. Patent No. 5,832,408 (“the ‘408 patent”), U.S. Patent No 5,987,375 (“the ‘375 patent”) and U.S. Patent No 6,097,316 (“the ‘316 patent”). On May 17, 2010, Garmin filed its answer asserting that each claim of the ‘060 patent, the ‘892 patent, the ‘408 patent and the ‘375 patent is invalid and/or not infringed. On April 12, 2011, the special master appointed by the court held a claim construction hearing. On December 12, 2011, the court issued an order adopting the special master’s report construing the claims of the patents-in-suit. On September 14, 2012, Garmin filed with the U.S. Patent and Trademark Office petitions for ex parte reexamination of the ‘408 patent and the ‘060 patent as being anticipated and obvious in view of the prior art. The U.S. Patent and Trademark Office subsequently granted Garmin’s requests for ex parte reexaminations and initially rejected all identified claims. On April 15, 2013, the U.S. Patent and Trademark Office issued a reexamination certificate confirming the patentability of the challenged claims of the ‘060 patent. On November 30, 2012, Garmin filed motions for summary judgment of non-infringement and/or invalidity for the ‘892, ‘316, and ‘375 patents. Visteon filed its own motions for summary judgment of infringement of the ‘408 patent and validity, under section 112, of the ‘375 and ‘060 patents.  On February 4, 2013, the summary judgment motions were referred to the special master for consideration. Although there can be no assurance that an unfavorable outcome of this litigation would not have a material adverse effect on our operating results, liquidity or financial position, Garmin believes that the claims in this lawsuit are without merit and intends to vigorously defend this action.

 

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Item 1A.Risk Factors

 

There are many risks and uncertainties that can affect our future business, financial performance or share price. In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 28, 2013. There have been no material changes during the 13-week period ended March 29, 2014 in the risks described in our Annual Report on Form 10-K. These risks, however, are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

Items (a) and (b) are not applicable.

 

(c) Issuer Purchases of Equity Securities

 

The Board of Directors approved a share repurchase program on February 15, 2013, authorizing the Company to purchase up to $300 million of its common shares as market and business conditions warrant. The share repurchase authorization expires on December 31, 2014. The following table lists the Company’s share purchases during the first quarter of fiscal 2014:

 

           Total Number of Shares   Maximum Number of Shares 
           Purchased as Part of   (or approx. Dollar Value of Shares 
   Total # of   Average Price   Publicly Announced   in Thousands) That May Yet Be 
Period  Shares Purchased   Paid Per Share   Plans or Programs   Purchased Under the Plans or Programs 
                 
                     
13-weeks ended March 29, 2014   618,700   $53.32    618,700   $208,474 
                     
Total   618,700   $53.32    618,700   $208,474 

 

Item 3.Defaults Upon Senior Securities

 

None

 

Item 4.Mine Safety Disclosures

 

Not applicable

 

Item 5.Other Information

 

Not applicable

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Item 6.Exhibits

 

Exhibit 3.1           Articles of Association of Garmin Ltd., as amended on April 25, 2014

 

Exhibit 31.1         Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).

 

Exhibit 31.2         Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).

 

Exhibit 32.1         Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 32.2         Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

Exhibit 101.INS XBRL Instance Document
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema
   
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase
   
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  GARMIN LTD.
     
By /s/ Kevin Rauckman
    Kevin Rauckman
    Chief Financial Officer
    (Principal Financial Officer and Principal Accounting Officer)

 

Dated:   April 30, 2014

 

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INDEX TO EXHIBITS

 

Exhibit No.   Description
     
Exhibit 3.1   Articles of Association of Garmin Ltd., as amended on April 25, 2014
     
Exhibit 31.1   Certification of Chief Executive Officer pursuant to Exchange Act  Rule 13a-14(a) or 15d-14(a).
     
Exhibit 31.2   Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a) or 15d-14(a).
     
Exhibit 32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C.   Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002
     
Exhibit 32.2   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

Exhibit 101.INS XBRL Instance Document
   
Exhibit 101.SCH XBRL Taxonomy Extension Schema
   
Exhibit 101.CAL XBRL Taxonomy Extension Calculation Linkbase
   
Exhibit 101.LAB XBRL Taxonomy Extension Label Linkbase
   
Exhibit 101.PRE XBRL Taxonomy Extension Presentation Linkbase
   
Exhibit 101.DEF XBRL Taxonomy Extension Definition Linkbase

 

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