Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations focuses on and is intended to clarify the results of our operations, certain changes in our financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included in this Form 10-K. This discussion should be read in conjunction with, and is qualified by reference to, the other related information including, but not limited to, the audited consolidated financial statements (including the notes thereto), the description of our business, all as set forth in this Form 10-K, as well as the risk factors discussed above in Item 1A.

As previously noted, the discussion set forth below, as well as other portions of this Form 10-K, contain statements concerning potential future events. Readers can identify these forward-looking statements by their use of such verbs as “expects,” “anticipates,” “believes” or similar verbs or conjugations of such verbs. If any of our assumptions on which the statements are based prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those discussed above in Item 1A. Readers are strongly encouraged to consider those factors when evaluating any such forward-looking statement. We do not undertake to update any forward-looking statements in this Form 10-K.

Garmin’s fiscal year is a 52-53 week period ending on the last Saturday of the calendar year. Fiscal year 2016 contains 53 weeks compared to 52 weeks for 2015 and 2014. Unless otherwise stated, all years and dates refer to the Company’s fiscal year and fiscal periods. Unless the context otherwise requires, references in this document to "we," "us," "our" and similar terms refer to Garmin Ltd. and its subsidiaries.

Unless otherwise indicated, dollar amounts set forth in the tables are in thousands, except per share data.

Overview

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

Since our first products were delivered in 1991, we have generated positive income from operations each year and have funded our growth from these profits.

Critical Accounting Policies and Estimates

General

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

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For information on each of the following critical accounting policies and/or estimates, refer to the discussion in the Notes to the Consolidated Financial Statements as indicated in the table below:

Revenue Recognition	Note 2 - Summary of Significant Accounting Policies
Trade Accounts Receivable	Note 2 - Summary of Significant Accounting Policies
Loan Receivable	Note 2 - Summary of Significant Accounting Policies
Warranties	Note 2 - Summary of Significant Accounting Policies
Inventory	Note 2 - Summary of Significant Accounting Policies
Long-Lived Assets (including Goodwill)	Note 2 - Summary of Significant Accounting Policies
Investments	Note 2 - Summary of Significant Accounting Policies & Note 3 - Marketable Securities
Income Taxes	Note 2 - Summary of Significant Accounting Policies & Note 6 - Income Taxes
Stock Based Compensation	Note 2 - Summary of Significant Accounting Policies & Note 9 - Stock Compensation Plans

Accounting Terms and Characteristics

Net Sales

Our net sales are primarily generated through sales to our retail partners, dealer and distributor network and to original equipment manufacturers. Refer to the Revenue Recognition discussion in Note 2 to the Consolidated Financial Statements. Our sales are largely of a consumer nature, and there is a relatively short cycle between order and shipment. Therefore, we believe that backlog levels are not necessarily indicative of our future sales results, and backlog information is not material to the understanding of our business. We typically ship most orders within 72 hours of receipt.

Net sales are subject to seasonal fluctuation. Sales of our consumer products are generally higher in the fourth quarter, due to increased demand during the holiday buying season, and, to a lesser extent, the second quarter, due to increased demand during the spring and summer season. Sales of consumer products are also influenced by the timing of the release of new products. Our aviation products do not experience much seasonal variation, but are more influenced by the timing of aircraft certifications and the release of new products when the initial demand is typically the strongest.

Cost of Sales/Gross Profit

Raw material costs are our most significant component of cost of goods sold. Our existing practice of performing the design and manufacture of our products in-house has enabled us to source components from different suppliers and, where possible, to redesign our products to leverage lower cost components. We believe that our flexible production model allows our Xizhi, Jhongli, and LinKou manufacturing plants in Taiwan; Yangzhou manufacturing plant in China; and our Olathe, Kansas, and Salem, Oregon manufacturing plants in the U.S. to experience relatively low costs of manufacturing. In general, products manufactured in Taiwan have been our highest volume products. Our manufacturing labor costs historically have been lower in Taiwan and China than in Olathe and Salem.

Sales price variability has had and can be expected to have an effect on our gross profit. In the past, prices of our devices sold into the auto market have declined due to market pressures and introduction of new products sold at lower price points. In recent years, pricing has stabilized in auto, allowing for relatively stable gross margins excluding the impact of deferred revenues and costs. The average selling prices of our aviation, outdoor, fitness, and marine products have historically been stable due to product mix and the introduction of more advanced products sold at higher prices. The effect of the sales price differences inherent within the mix of products sold could have a significant impact on our gross profit.

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Advertising Expense

Our advertising expenses consist of costs for media advertising, cooperative advertising with our retail partners, point of sale displays, and sponsorships.

Selling, General and Administrative Expenses

Our selling, general and administrative expenses consist primarily of:

	·	salaries for sales, marketing and product support personnel;

	·	salaries and related costs for executives and administrative personnel;

	·	marketing, and other brand building costs;

	·	accounting and legal costs;

	·	information systems and infrastructure costs;

	·	travel and related costs; and

	·	occupancy and other overhead costs.

Research and Development

The majority of our research and development costs represent salaries for our engineers, costs for high technology components and costs of test equipment used in product and prototype development.

We are committed to increasing the level of innovative design and development of new products as we strive for expanded ability to serve our existing consumer and aviation markets as well as new markets for active lifestyle products.

Income Taxes

We have experienced a relatively low effective corporate tax rate due to the proportion of our revenue generated by entities in tax jurisdictions with low statutory rates. In particular, the profit entitlement afforded our Swiss-based companies based on their intellectual property rights ownership of our consumer products have contributed to our relatively low effective corporate tax rate.

Results of Operations

The following table sets forth our results of operations as a percentage of net sales during the periods shown (the table may not foot due to rounding):

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		53-weeks ended				52-weeks ended				52-weeks ended
		Dec. 31,				Dec. 26,				Dec. 27,
		2016				2015				2014
Net sales			100	%			100	%			100	%
Cost of goods sold			44	%			45	%			44	%
Gross profit			56	%			55	%			56	%
Operating expenses:
Advertising			6	%			6	%			5	%
Selling, general and administrative			14	%			14	%			13	%
Research and development			16	%			15	%			14	%
Total operating expenses			35	%			35	%			32	%
Operating income			21	%			19	%			24	%
Other income, net			0	%			1	%			1	%
Income before income taxes			21	%			20	%			25	%
Provision for income taxes			4	%			4	%			13	%
Net income			17	%			16	%			13	%

In 2016 the Company moved action camera related revenue and expenses from the outdoor segment to the auto segment, allowing for alignment and synergies with other camera-based efforts occurring within the auto segment. The overall impact of the move was immaterial. However, action camera related operating results for the 52-weeks ended December 26, 2015 and December 27, 2014 have been recast to conform to the current year presentation.

The following table sets forth our results of operations through operating income for each of our five segments during the period shown. For each line item in the table, the total of the segments’ amounts equals the amount in the consolidated statements of income data included in Item 6.

53-weeks ended December 31, 2016		Outdoor				Fitness				Marine				Auto				Aviation
Net sales		$	546,326			$	818,486			$	331,947			$	882,558			$	439,348
Cost of goods sold			205,822				381,281				148,238				493,811				109,943
Gross profit			340,504				437,205				183,709				388,747				329,405
Advertising expense			31,005				90,871				15,516				33,122				6,629
Selling, general and administrative expenses			77,016				118,753				60,061				127,618				27,110
Research and development expense			48,448				66,985				55,965				125,660				170,902
Total operating expenses			156,469				276,609				131,542				286,400				204,641
Operating income		$	184,035			$	160,596			$	52,167			$	102,347			$	124,764

52-weeks ended December 26, 2015		Outdoor				Fitness				Marine				Auto				Aviation
Net sales		$	411,184			$	661,599			$	286,778			$	1,062,091			$	398,618
Cost of goods sold			156,306				295,460				128,285				597,611				103,904
Gross profit			254,878				366,139				158,493				464,480				294,714
Advertising expense			24,655				79,737				16,106				40,710				5,958
Selling, general and administrative expenses			54,132				97,809				60,834				157,151				24,988
Research and development expense			37,021				54,019				52,942				130,550				152,511
Total operating expenses			115,808				231,565				129,883				328,411				183,457
Operating income		$	139,070			$	134,574			$	28,611			$	136,069			$	111,257

52-weeks ended December 27, 2014		Outdoor				Fitness				Marine				Auto				Aviation
Net sales		$	409,847			$	568,440			$	248,371			$	1,258,085			$	385,915
Cost of goods sold			143,188				210,153				118,661				688,742				105,502
Gross profit			266,659				358,287				129,710				569,343				280,413
Advertising expense			28,650				52,606				12,353				46,245				6,779
Selling, general and administrative expenses			52,203				75,747				42,975				177,649				23,458
Research and development expense			29,747				39,252				48,150				134,774				143,198
Total operating expenses			110,600				167,605				103,478				358,668				173,435
Operating income		$	156,059			$	190,682			$	26,232			$	210,675			$	106,978

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Comparison of 53-Weeks Ended December 31, 2016 and 52-Weeks Ended December 26, 2015

Net Sales

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015								Year over Year
		Net Sales				% of Revenues				Net Sales				% of Revenues				$ Change				% Change
Outdoor		$	546,326				18	%		$	411,184				15	%		$	135,142				33	%
Fitness			818,486				27	%			661,599				23	%			156,887				24	%
Marine			331,947				11	%			286,778				10	%			45,169				16	%
Auto			882,558				29	%			1,062,091				38	%			(179,533	)			-17	%
Aviation			439,348				15	%			398,618				14	%			40,730				10	%
Total		$	3,018,665				100	%		$	2,820,270				100	%		$	198,395				7	%

Net sales increased 7% in 2016 when compared to the year-ago period. All segments had an increase in revenue except for auto. Auto revenue remains the largest portion of our revenue mix at 29% in the 53-weeks ended 2016 compared to 38% in the 52-weeks ended 2015.

Total unit sales increased 4% to 16.8 million units in 2016 from 16.2 million units in 2015.

Auto segment revenue decreased 17% from the year-ago period, primarily due to the ongoing PND market contraction. Outdoor, fitness, marine, and aviation revenues increased 33%, 24%, 16%, and 10%, respectively, when compared to the year-ago period, primarily due to increases in sales volumes. Growth in outdoor was driven by wearables and the newly acquired DeLorme product lines. The increase in fitness was driven by wearables with Garmin ElevateTM wrist heart rate technology. Our marine segment increased due to growth in chartplotters, fishfinders, and entertainment systems. Aviation revenues increased due to growth in both OEM and aftermarket sales.

Cost of Goods Sold

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015								Year over Year
		Cost of Goods				% of Revenues				Cost of Goods				% of Revenues				$ Change				% Change
Outdoor		$	205,822				38	%		$	156,306				38	%		$	49,516				32	%
Fitness			381,281				47	%			295,460				45	%			85,821				29	%
Marine			148,238				45	%			128,285				45	%			19,953				16	%
Auto			493,811				56	%			597,611				56	%			(103,800	)			-17	%
Aviation			109,943				25	%			103,904				26	%			6,039				6	%
Total		$	1,339,095				44	%		$	1,281,566				45	%		$	57,529				4	%

Cost of goods sold increased 4% in absolute dollars for the 53-weeks ended December 31, 2016 when compared to the 52-weeks ended December 26, 2015.

In the auto segment, the cost of goods decline was largely consistent with the segment revenue decline. In the outdoor and fitness segments, the increases of 32% and 29% in cost of goods sold, respectively, primarily reflect strong volume growth. In the marine and aviation segments, the increases of 16% and 6%, respectively, primarily reflect volume growth.

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Gross Profit

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015								Year over Year
		Gross Profit				% of Revenues				Gross Profit				% of Revenues				$ Change				% Change
Outdoor		$	340,504				62	%		$	254,878				62	%		$	85,626				34	%
Fitness			437,205				53	%			366,139				55	%			71,066				19	%
Marine			183,709				55	%			158,493				55	%			25,216				16	%
Auto			388,747				44	%			464,480				44	%			(75,733	)			-16	%
Aviation			329,405				75	%			294,714				74	%			34,691				12	%
Total		$	1,679,570				56	%		$	1,538,704				55	%		$	140,866				9	%

Gross profit dollars in the 53-weeks ended December 31, 2016 increased 9% while gross profit margin increased 100 basis points compared to the 52-weeks ended December 26, 2015. Growth in sales of higher margin segments contributed to the increase in gross profit dollars and gross margin percentage. Fitness margin declined to 53% due to product mix. All other segment gross margin rates are relatively consistent between fiscal periods.

Advertising Expenses

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015
		Advertising								Advertising								Year over Year
		Expense				% of Revenues				Expense				% of Revenues				$ Change				% Change
Outdoor		$	31,005				6	%		$	24,655				6	%		$	6,350				26	%
Fitness			90,871				11	%			79,737				12	%			11,134				14	%
Marine			15,516				5	%			16,106				6	%			(590	)			-4	%
Auto			33,122				4	%			40,710				4	%			(7,588	)			-19	%
Aviation			6,629				2	%			5,958				1	%			671				11	%
Total		$	177,143				6	%		$	167,166				6	%		$	9,977				6	%

Advertising expense increased 6% in absolute dollars and was relatively flat as a percent of revenues in the 53-weeks ended December 31, 2016 compared to the 52-weeks ended December 26, 2015. The increase in absolute dollars is primarily attributable to outdoor and fitness, partially offset by auto.

Selling, General and Administrative Expenses

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015
		Selling, General &								Selling, General &								Year over Year
		Admin. Expenses				% of Revenues				Admin. Expenses				% of Revenues				$ Change				% Change
Outdoor		$	77,016				14	%		$	54,132				13	%		$	22,884				42	%
Fitness			118,753				15	%			97,809				15	%			20,944				21	%
Marine			60,061				18	%			60,834				21	%			(773	)			-1	%
Auto			127,618				14	%			157,151				15	%			(29,533	)			-19	%
Aviation			27,110				6	%			24,988				6	%			2,122				8	%
Total		$	410,558				14	%		$	394,914				14	%		$	15,644				4	%

Selling, general and administrative expense increased 4% and was relatively flat as a percent of revenues in the 53-weeks ended December 31, 2016 compared to the 52-weeks ended December 26, 2015. The absolute dollar increase is primarily attributable to information technology costs and salaries and benefits. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues with the exception of the marine segment, as expenses decreased as a percentage of revenue due to prior year specific litigation matters.

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Research and Development Expense

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015
		Research &								Research &								Year over Year
		Development				% of Revenues				Development				% of Revenues				$ Change				% Change
Outdoor		$	48,448				9	%		$	37,021				9	%		$	11,427				31	%
Fitness			66,985				8	%			54,019				8	%			12,966				24	%
Marine			55,965				17	%			52,942				18	%			3,023				6	%
Auto			125,660				14	%			130,550				12	%			(4,890	)			-4	%
Aviation			170,902				39	%			152,511				38	%			18,391				12	%
Total		$	467,960				16	%		$	427,043				15	%		$	40,917				10	%

Research and development expense increased 10% due to ongoing development activities for new products and additional engineering personnel throughout the 53-weeks ended December 31, 2016. In absolute dollars, research and development costs increased $40.9 million when compared with the 52-weeks ended December 26, 2015, and increased 40 basis points as a percent of revenue. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories.

Operating Income

		53-weeks ended December 31, 2016								52-weeks ended December 26, 2015								Year over Year
		Operating Income				% of Revenues				Operating Income				% of Revenues				$ Change				% Change
Outdoor		$	184,035				34	%		$	139,070				34	%		$	44,965				32	%
Fitness			160,596				20	%			134,574				20	%			26,022				19	%
Marine			52,167				16	%			28,611				10	%			23,556				82	%
Auto			102,347				12	%			136,069				13	%			(33,722	)			-25	%
Aviation			124,764				28	%			111,257				28	%			13,507				12	%
Total		$	623,909				21	%		$	549,581				19	%		$	74,328				14	%

As a result of the above, operating income increased 14% in absolute dollars and 120 basis points as a percent of revenue when compared to the 52-weeks ended December 26, 2015. Revenue growth with a slight increase in gross margin percentage contributed to the growth, slightly offset by increased operating expenses, as discussed above, with the exception of the marine segment, as operating expenses decreased as a percentage of revenue due to prior year specific litigation matters.

Other Income (Expense)

		53-weeks ended				52-weeks ended
		December 31, 2016				December 26, 2015
Interest income		$	33,406			$	29,653
Foreign currency gains (losses)			(31,651	)			(23,465	)
Other			4,006				11,418
Total		$	5,761			$	17,606

The average return on cash and investments during the 53-weeks ended December 31, 2016 and the 52-weeks ended December 26, 2015 were 1.5% and 1.2%, respectively. Interest income increased primarily due to slightly higher yields on fixed-income securities.

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

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The $31.7 million currency loss in fiscal 2016 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar and the strengthening of the U.S. Dollar against the Euro and British Pound Sterling. During fiscal 2016, the U.S. Dollar weakened 1.7% against the Taiwan Dollar, resulting in a loss of $9.2 million, while the U.S. Dollar strengthened 4.2% against the Euro and 16.8% against the British Pound Sterling, resulting in losses of $13.0 million and $5.1 million, respectively. The remaining net currency loss of $4.4 million is related to other currencies and timing of transactions.

The $23.5 million currency loss in fiscal 2015 was primarily due to the strengthening of the U.S. Dollar against the Euro and British Pound Sterling, partially offset by a gain associated with the strengthening of the U.S. Dollar against the Taiwan Dollar. During fiscal 2015, the U.S. Dollar strengthened 10.0% against the Euro and 4.6% against the British Pound Sterling, resulting in losses of $31.2 million and $2.1 million, respectively. This was largely offset by the U.S. Dollar strengthening 3.8% against the Taiwan Dollar, resulting in a gain of $19.5 million. The remaining net currency loss of $9.7 million is related to other currencies and timing of transactions.

During the 53-weeks ended December 31, 2016, Garmin recorded other income of $4.0 million compared to $11.4 million in the 52-weeks ended December 26, 2015. The decrease in fiscal 2016 relates primarily to a legal settlement received in fiscal 2015.

Income Tax Provision

Our income tax expense increased by $7.9 million, to $118.9 million for the 53-weeks ended December 31, 2016, from $111.0 million for the 52-weeks ended December 26, 2015. Contributing to the increase was:

	·	Increased income before taxes in the 53-weeks ended December 31, 2016 compared to the 52-weeks ended December 26, 2015,

Partially offset by:

	·	A net release of uncertain tax position reserves due to expiration of certain statutes of limitations of $11.9 million for the 53-weeks ended December 31, 2016, as compared with $7.3 million for the 52-weeks ended December 26, 2015.

As described in Note 14, the Company expects to revalue certain Switzerland deferred tax assets, for which the Company anticipates recording approximately $150 million of income tax benefit in the first quarter of 2017. This may result in cash outlays for income taxes exceeding income tax expense recognized in certain future periods.

Net Income

As a result of the various factors noted above, net income increased 12% to $510.8 million for the 53-weeks ended December 31, 2016 compared to $456.2 million for the 52-weeks ended December 26, 2015.

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Comparison of 52-Weeks Ended December 26, 2015 and December 27, 2014

In 2016 the Company moved action camera related revenue and expenses from the outdoor segment to the auto segment, allowing for alignment and synergies with other camera-based efforts occurring within the auto segment. The overall impact of the move was immaterial. However, action camera related operating results for the 52-weeks ended December 26, 2015 and December 27, 2014 have been recast to conform to the current year presentation.

Net Sales

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014								Year over Year
		Net Sales				% of Revenues				Net Sales				% of Revenues				$ Change				% Change
Outdoor		$	411,184				15	%		$	409,847				14	%		$	1,337				0	%
Fitness			661,599				23	%			568,440				20	%			93,159				16	%
Marine			286,778				10	%			248,371				9	%			38,407				15	%
Auto			1,062,091				38	%			1,258,085				44	%			(195,994	)			-16	%
Aviation			398,618				14	%			385,915				13	%			12,703				3	%
Total		$	2,820,270				100	%		$	2,870,658				100	%		$	(50,388	)			-2	%

Net sales decreased 2% in 2015 when compared to fiscal year 2014. All segments, excluding aviation, were impacted by revenues denominated in currencies that weakened against the U.S. Dollar during the period. In total, it is estimated that the strong U.S. Dollar reduced revenues by approximately $189 million, which represents 6% of revenue. Auto revenue remains the largest portion of our revenue mix at 38% in the fiscal year 2015 compared to 44% in the fiscal year 2014.

Total unit sales increased 7% to 16.2 million units in 2015 from 15.1 million units in 2014. The increase in unit sales volume was attributable to fitness and marine volumes partially offset by declines in each of the other segments.

Auto segment revenue decreased 16% from fiscal year 2014, as both the contribution of amortization of previously deferred revenue declined when compared to 2014 and volumes declined. Fitness revenues increased 16% on the strength of our wearables portfolio. Aviation revenues increased 3% from fiscal year 2014 as market share gains were partially offset by industry weakness. Outdoor revenues remained relatively flat to fiscal year 2014, as geographic exposure to weak currencies and maturing product categories were largely offset by the strength of outdoor wearables. Revenues in our marine segment increased 15% as the release of new marine products drove strong revenue growth.

Cost of Goods Sold

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014								Year over Year
		Cost of Goods				% of Revenues				Cost of Goods				% of Revenues				$ Change				% Change
Outdoor		$	156,306				38	%		$	143,188				35	%		$	13,118				9	%
Fitness			295,460				45	%			210,153				37	%			85,307				41	%
Marine			128,285				45	%			118,661				48	%			9,624				8	%
Auto			597,611				56	%			688,742				55	%			(91,131	)			-13	%
Aviation			103,904				26	%			105,502				27	%			(1,598	)			-2	%
Total		$	1,281,566				45	%		$	1,266,246				44	%		$	15,320				1	%

Cost of goods sold increased 1% in absolute dollars for fiscal year 2015 when compared to fiscal year 2014. Cost of goods as a percentage of revenue increased in part due to a stronger U.S. Dollar that created downward pressure on revenue in all segments excluding aviation as discussed above.

In the auto segment, the cost of goods decline was largely consistent with the segment revenue decline. In the fitness and outdoor segments, the cost of goods increase outpaced revenue growth due to product mix and competitive pricing dynamics. The cost of goods decrease as a percentage of revenue in marine is due to increased sales of higher margin products. Aviation cost of goods was lower due to product mix.

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Gross Profit

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014								Year over Year
		Gross Profit				% of Revenues				Gross Profit				% of Revenues				$ Change				% Change
Outdoor		$	254,878				62	%		$	266,659				65	%		$	(11,781	)			-4	%
Fitness			366,139				55	%			358,287				63	%			7,852				2	%
Marine			158,493				55	%			129,710				52	%			28,783				22	%
Auto			464,480				44	%			569,343				45	%			(104,863	)			-18	%
Aviation			294,714				74	%			280,413				73	%			14,301				5	%
Total		$	1,538,704				55	%		$	1,604,412				56	%		$	(65,708	)			-4	%

Gross profit dollars in fiscal year 2015 decreased 4% while gross profit margin decreased 130 basis points compared to fiscal year 2014 with all segments declining, excluding marine and aviation. Segment specific gross margin drivers are discussed above.

Advertising Expenses

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014
		Advertising								Advertising								Year over Year
		Expense				% of Revenues				Expense				% of Revenues				$ Change				% Change
Outdoor		$	24,655				6	%		$	28,650				7	%		$	(3,995	)			-14	%
Fitness			79,737				12	%			52,606				9	%			27,131				52	%
Marine			16,106				6	%			12,353				5	%			3,753				30	%
Auto			40,710				4	%			46,245				4	%			(5,535	)			-12	%
Aviation			5,958				1	%			6,779				2	%			(821	)			-12	%
Total		$	167,166				6	%		$	146,633				5	%		$	20,533				14	%

Advertising expense increased 14% in absolute dollars while increasing 80 basis points as a percent of revenues. The increase in absolute dollars occurred in fitness and marine to support new product introductions with increased media spend, point of sale presence at key retailers and cooperative advertising. This was partially offset by decreased spending in auto due to reduced cooperative advertising associated with lower volumes and in outdoor due to fewer new product categories.

Selling, General and Administrative Expenses

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014
		Selling, General &								Selling, General &								Year over Year
		Admin. Expenses				% of Revenues				Admin. Expenses				% of Revenues				$ Change				% Change
Outdoor		$	54,132				13	%		$	52,203				13	%		$	1,929				4	%
Fitness			97,809				15	%			75,747				13	%			22,062				29	%
Marine			60,834				21	%			42,975				17	%			17,859				42	%
Auto			157,151				15	%			177,649				14	%			(20,498	)			-12	%
Aviation			24,988				6	%			23,458				6	%			1,530				7	%
Total		$	394,914				14	%		$	372,032				13	%		$	22,882				6	%

Selling, general and administrative expense increased 6% in absolute dollars and 100 basis points as a percent of revenues compared to fiscal year 2014. The absolute dollar increase is primarily related to litigation related costs, information technology costs and product support. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues. Marine expense growth exceeded other segments due to specific litigation matters.

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Research and Development Expense

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014
		Research &								Research &								Year over Year
		Development				% of Revenues				Development				% of Revenues				$ Change				% Change
Outdoor		$	37,021				9	%		$	29,747				7	%		$	7,274				24	%
Fitness			54,019				8	%			39,252				7	%			14,767				38	%
Marine			52,942				18	%			48,150				19	%			4,792				10	%
Auto			130,550				12	%			134,774				11	%			(4,224	)			-3	%
Aviation			152,511				38	%			143,198				37	%			9,313				7	%
Total		$	427,043				15	%		$	395,121				14	%		$	31,922				8	%

Research and development expense increased 8% due to ongoing development activities for new products and additional engineering personnel throughout fiscal year 2015. In absolute dollars, research and development costs increased $31.9 million when compared with fiscal year 2014 and increased 140 basis points as a percent of revenue. Our research and development spending is focused on product development, improving existing software capabilities, and exploring new categories. Management believes that one of the key strategic initiatives for future growth and success of Garmin is continuous innovation, development, and introduction of new products.

Operating Income

		52-weeks ended Dec 26, 2015								52-weeks ended Dec 27, 2014								Year over Year
		Operating Income				% of Revenues				Operating Income				% of Revenues				$ Change				% Change
Outdoor		$	139,070				34	%		$	156,059				38	%		$	(16,989	)			-11	%
Fitness			134,574				20	%			190,682				34	%			(56,108	)			-29	%
Marine			28,611				10	%			26,232				11	%			2,379				9	%
Auto			136,069				13	%			210,675				17	%			(74,606	)			-35	%
Aviation			111,257				28	%			106,978				28	%			4,279				4	%
Total		$	549,581				19	%		$	690,626				24	%		$	(141,045	)			-20	%

As a result of the above, operating income decreased 20% in absolute dollars and 460 basis points as a percent of revenue when compared to the fiscal year 2014. Declining gross margin percentages and increases in all operating expenses as a percentage of revenue, as discussed above, contributed to the decline.

Other Income (Expense)

		52-weeks ended				52-weeks ended
		December 26, 2015				December 27, 2014
Interest Income		$	29,653			$	35,584
Foreign Currency gains (losses)			(23,465	)			(4,299	)
Other			11,418				1,834
Total		$	17,606			$	33,119

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The average return on cash and investments during the fiscal years of 2015 and 2014 were 1.2% and 1.3%, respectively. The decrease in interest income is attributable to decreasing cash and investment balances and a slight decrease in the interest rates.

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. The majority of the Company’s consolidated foreign currency gain or loss results from the significant cash and marketable securities, receivables and payables held in a currency other than the functional currency at one of the Company’s subsidiaries. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

The $23.5 million currency loss in fiscal 2015 was primarily due to the strengthening of the U.S. Dollar against the Euro and British Pound Sterling, partially offset by a gain associated with the strengthening of the U.S. Dollar against the Taiwan Dollar. During fiscal 2015, the U.S. Dollar strengthened 10.0% against the Euro and 4.6% against the British Pound Sterling, resulting in losses of $31.2 million and $2.1 million, respectively. This was largely offset by the U.S. Dollar strengthening 3.8% against the Taiwan Dollar, resulting in a gain of $19.5 million. The remaining net currency loss of $9.7 million is related to other currencies and timing of transactions.

The majority of the $4.3 million currency loss in the fiscal year 2014 was due to the strengthening of the U.S. Dollar compared to the Euro and the British Pound Sterling. The strengthening of the U.S. Dollar compared to the Taiwan Dollar contributed an offsetting gain. During fiscal year 2014, the U.S. Dollar strengthened 11.4% compared to the Euro and 5.5% compared to the British Pound Sterling resulting in a net loss of $43.7 million. This was more than offset as the U.S. Dollar strengthened 5.5% compared to the Taiwan Dollar resulting in a gain of $44.8 million. The remaining net currency loss of $5.4 million is related to other currencies and timing of transactions.

During fiscal year 2015, Garmin recorded other income of $11.4 million. This income was primarily due to a legal settlement received during the year and a gain on the disposal of property.

Income Tax Provision

Our income tax expense decreased by $248.6 million, to $111.0 million for the fiscal year 2015, from $359.5 million for the fiscal year 2014. Contributing to the significant decrease was:

	·	tax expense of $307.6 million in 2014 associated with the inter-company restructuring discussed below,

Partially offset by:

	·	release of uncertain tax position reserves due to expiration of certain statutes of limitations or completion of tax audits of $7.3 million in fiscal year 2015 compared to releases of $83.9 million in fiscal year 2014.

In addition, the full year income mix by tax jurisdiction for 2015 compared to 2014 is resulting in an increased effective tax rate.

In the third quarter of 2014, the Company initiated an inter-company restructuring that realigned our corporate entity structure. This change in corporate structure provides access to historical earnings that were previously permanently reinvested and allows us to efficiently repatriate future earnings. As a result of the change in corporate structure, Garmin recorded tax expense of $307.6 million. The cash tax payments of $78.1 million and $182.8 million associated with the restructuring were made in the third quarter of 2014 and the second quarter of 2015, respectively. The remainder of the accrued tax will be paid incrementally as the cash is repatriated.

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Net Income

As a result of the various factors noted above, net income increased 25% to $456.2 million for the fiscal year 2015 compared to $364.2 million for the fiscal year 2014.

Liquidity and Capital Resources

Operating Activities

		Fiscal Year Ended
		Dec 31,				Dec 26,				Dec 27,
(In thousands)		2016				2015				2014
Net cash provided by operating activities		$	705,682			$	280,467			$	522,711

The $425.2 million increase in cash provided by operating activities in fiscal year 2016 compared to fiscal year 2015 was primarily due to the following:

	·	the impact of income taxes payable providing $154.0 million more cash, primarily related to the timing of 2015 income tax payments associated with the inter-company restructuring that was announced in the third quarter of 2014

	·	inventories and related provisions for obsolete and slow moving inventories providing $122.5 million more cash primarily due to reduced purchases of safety stock of specific raw materials and strong demand of products throughout the fiscal year

	·	other current and noncurrent assets providing $109.6 million more cash primarily related to the timing of prepayments for royalties

	·	net income increasing $54.6 million as discussed in the Results of Operations section above

	·	other current and noncurrent liabilities providing $24.0 million more cash primarily due to timing of payments for royalties

	·	deferred revenue/costs providing $21.8 million more working capital benefit due to the net decrease in amortization of previously deferred revenue/cost and

	·	the increase in stock compensation expense of $15.0 million, primarily associated with performance-contingent awards

Partially offset by:

	·	accounts payable providing $47.6 million less cash primarily due to the timing of payments

	·	the $24.5 million impact of decreasing unrealized foreign currency losses due primarily to foreign currency rate fluctuations as discussed in the Results of Operations section above and

	·	accounts receivable providing $13.5 million less cash primarily due to the timing of collections

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The $242.2 million decrease in cash provided by operating activities in fiscal year 2015 compared to fiscal year 2014 was primarily due to the following:

	·	the impact of income tax payable providing $247.0 million less cash due primarily to the timing of disbursements related to the inter-company restructuring

	·	other current and noncurrent assets providing $108.0 million less cash primarily due to prepayments of royalties and timing of payments for insurance

	·	the impact of deferred income taxes providing $83.9 million less cash primarily due to the timing of withholding taxes paid and

	·	inventories and related provisions for obsolete and slow moving inventories providing $47.9 million less cash primarily due to additional safety stock of specific raw materials and continued growth in products offered

Partially offset by:

	·	net income increasing $92.0 million, as discussed in the Results of Operations section above

	·	accounts receivable providing $49.9 million more cash primarily due to the impact of lower revenues and associated decline in receivables

	·	the impact of increasing unrealized foreign currency losses providing $37.4 million less cash due to the impact of foreign currency rate fluctuations as discussed in the Results of Operations section above

	·	deferred revenue/costs providing $32.6M more working capital benefit due to the decreased amortization of previously deferred revenue/cost as discussed in the Results of Operations section above and

	·	accounts payable providing $27.1 million more cash primarily due to the timing of payments

Investing Activities

		Fiscal Year Ended
		Dec 31,				Dec 26,				Dec 27,
(In thousands)		2016				2015				2014
Net cash (used in) provided by investing activities		$	(121,537	)		$	(111,979	)		$	131,332

The $9.6 million increase in cash used in investing activities in fiscal year 2016 compared to fiscal year 2015 was primarily due to the following:

	·	increased cash payments for acquisitions of $39.3 million

	·	increased purchases of property and equipment of $10.4 million and

	·	decreased proceeds from the sale of property and equipment of $7.2 million

Partially offset by:

	·	increased net redemptions of marketable securities of $49.0 million

The $243.3 million decrease in cash provided by investing activities in fiscal year 2015 compared to fiscal year 2014 was primarily due to the following:

	·	collection of cash advanced under a loan receivable commitment with Bombardier of $137.4 million in 2014

	·	decreased net investments in marketable securities of $87.0 million and

	·	increased cash payments for acquisitions of $19.8 million

	55

We have budgeted approximately $130 million to $140 million of capital expenditures during fiscal 2017 to include some facility expansion, along with normal ongoing capital expenditures and maintenance activities. Approximately half of the budgeted capital expenditures in fiscal 2017 are attributable to Olathe, Kansas facilities, including the expansion project described within “Item 2. Properties”. It is management’s goal to invest the on-hand cash in accordance with the investment policy, which has been approved by the Board of Directors of each applicable Garmin entity holding the cash. 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 returns on cash and investments during fiscal 2016, 2015, and 2014 were approximately 1.5%, 1.2%, and 1.3%, respectively.

The Company’s investment policy targets low risk investments with the objective of minimizing the potential risk of principal loss. The fair value of our securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. See Note 3 for additional information regarding marketable securities.

Financing Activities

		Fiscal Year Ended
		Dec 31,				Dec 26,				Dec 27,
(In thousands)		2016				2015				2014
Net cash used in financing activities		$	(561,676	)		$	(500,092	)		$	(599,622	)

The $61.6 million increase in cash used in financing activities in fiscal year 2016 compared to fiscal year 2015 was primarily due to the following:

	·	increased dividend payments of $103.3 million due to an additional dividend payment made in fiscal year 2016 due to the 53-week year and the year-over-year increase of our dividend rate

Partially offset by:

	·	decreased purchases of treasury stock of $38.2 million under our share repurchase authorization

The $99.5 million decrease in cash used in financing activities in fiscal year 2015 compared to fiscal year 2014 was primarily due to the following:

	·	decreased purchase of treasury stock of $110.2 million under a share repurchase authorization

Partially offset by:

	·	increased dividend payments of $18.0 million due to the increase in our year-over-year dividend rate

Our dividend has progressively increased from $0.45 per share for the eight calendar quarters beginning in June 2012 to $0.48 per share for the four calendar quarters beginning in June 2014 to $0.51 per share for the eight calendar quarters beginning in June 2015.

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

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Contractual Obligations and Commercial Commitments

As of December 31, 2016, operating leases comprise the substance of the Company’s commercial commitments with long-term scheduled payments, as summarized below:

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Operating Leases		$	73,305			$	15,229			$	22,003			$	14,905			$	21,168

The Company is party to certain other commitments, which include purchases of raw materials, advertising expenditures, investments in certain low income housing tax credit projects, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of December 31, 2016 was approximately $403.1 million. We cannot determine the aggregate amount of such purchase orders that represent contractual obligations because purchase orders may represent authorizations to purchase rather than binding agreements. Our purchase orders are based on our current needs and are typically fulfilled within short periods of time.

We may be required to make significant cash outlays related to unrecognized tax benefits. However, due to the uncertainty of the timing of future cash flows associated with our unrecognized tax benefits, we are unable to make reasonably reliable estimates of the period of cash settlement, if any, with the respective taxing authorities. Accordingly, unrecognized tax benefits of $115.1 million as of December 31, 2016, have been excluded from the contractual obligations table above. For further information related to unrecognized tax benefits, see Note 2, “Income Taxes,” to the consolidated financial statements included in this Report.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.