Part I - Financial Information				Page
Item 1.		Condensed Consolidated Financial Statements (Unaudited)		3
		Introductory Comments		3
		Condensed Consolidated Balance Sheets at March 31, 2007
		and December 30, 2006		4
		Condensed Consolidated Statements of Income for the
		13-weeks ended March 31, 2007 and April 1, 2006		5
		Condensed Consolidated Statements of Cash Flows for the
		13-weeks ended March 31, 2007 and April 1, 2006		6
		Notes to Condensed Consolidated Financial Statements		7
Item 2.		Management's Discussion and Analysis of
		Financial Condition and Results of Operations		12
Item 3.		Quantitative and Qualitative Disclosures About
		Market Risk		18
Item 4.		Controls and Procedures		19
Part II - Other Information
Item 1.		Legal Proceedings		20
Item 1A.		Risk Factors		22
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		22
Item 3.		Defaults Upon Senior Securities		22
Item 4.		Submission of Matters to a Vote of Securities Holders		22
Item 5.		Other Information		22
Item 6.		Exhibits		23
Signature Page				24
Index to Exhibits				25

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Garmin Ltd.

Form 10-Q

Quarter Ended March 31, 2007

Part I - Financial Information

Item 1. Condensed Consolidated Financial Statements (Unaudited)

Introductory Comments

The Condensed Consolidated Financial Statements of Garmin Ltd. ("Garmin" or the "Company") included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These Condensed Consolidated Financial Statements should be read in conjunction with the audited financial statements and the notes thereto for the year ended December 30, 2006. 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.

The results of operations for the 13-week period ended March 31, 2007 are not necessarily indicative of the results to be expected for the full year 2007.

 

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Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except share information)

 

		March 31,			December 30,
		2007			2006
Assets
Current assets:
Cash and cash equivalents		$	479,380		$	337,321
Marketable securities			93,674			73,033
Accounts receivable, net			334,010			403,524
Inventories, net			283,200			271,008
Deferred income taxes			55,138			55,996
Prepaid expenses and other current assets			25,136			28,202
Total current assets			1,270,538			1,169,084
Property and equipment, net			257,935			250,988
Marketable securities			337,770			407,843
Restricted cash			1,529			1,525
Licensing agreements, net			16,508			3,307
Other intangible assets, net			132,888			64,273
Total assets		$	2,017,168		$	1,897,020
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable		$	110,119		$	88,375
Salaries and benefits payable			16,364			16,268
Accrued warranty costs			39,281			37,639
Other accrued expenses			65,738			100,732
Income taxes payable			11,918			94,668
Total current liabilities			243,420			337,682
Long-term debt, less current portion			233			248
Deferred income taxes			1,359			1,191
Other liabilities			76,474			-
Stockholders' equity:
Common stock, $0.005 par value, 500,000,000 shares authorized:
Issued and outstanding shares- 216,273,000 as of March 31, 2007 and 216,098,000 as of December 30, 2006			1,083			1,082
Additional paid-in capital			92,423			83,438
Retained earnings			1,618,515			1,478,654
Accumulated other comprehensive loss			(16,339	)		(5,275	)
Total stockholders' equity			1,695,682			1,557,899
Total liabilities and stockholders' equity		$	2,017,168		$	1,897,020

 

See accompanying notes.

 

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Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

 

		13-Weeks Ended
		March 31,			April 1,
		2007			2006
Net sales		$	492,159		$	322,311
Cost of goods sold			254,407			159,521
Gross profit			237,752			162,790
Selling, general and
administrative expenses			65,925			37,764
Research and development
expense			33,503			24,913
			99,428			62,677
Operating income			138,324			100,113
Other income (expense):
Interest income			9,359			7,305
Interest expense			(32	)		(8	)
Foreign currency			13,205			(7,446	)
Other			51			3,605
			22,583			3,456
Income before income taxes			160,907			103,569
Income tax provision			21,047			16,053
Net income		$	139,860		$	87,516
Net income per share:
Basic		$	0.65		$	0.40
Diluted		$	0.64		$	0.40
Weighted average common
shares outstanding:
Basic			216,215			216,370
Diluted			218,704			218,322

 

See accompanying notes.

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Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		13-Weeks Ended
		March 31,			April 1,
		2007			2006
Operating Activities:
Net income		$	139,860		$	87,516
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation			6,213			5,050
Amortization			9,872			8,922
Loss (gain) on sale of property and equipment			27			172
Provision for doubtful accounts			991			500
Deferred income taxes			2,159			(7,725	)
Foreign currency transaction gains/losses			(13,052	)		10,290
Provision for obsolete and slow moving inventories			8,156			4,712
Stock compensation expense			3,955			2,500
Realized gains on marketable securities			-			(3,852	)
Changes in operating assets and liabilities:
Accounts receivable			84,886			(29,753	)
Inventories			(16,772	)		(5,124	)
Other current assets			2,947			(18,141	)
Accounts payable			6,252			(7,707	)
Other current and non-current liabilities			(34,628	)		3,580
Income taxes			(11,993	)		5,725
Purchase of licenses			(20,203	)		(449	)
Net cash provided by operating activities			168,670			56,216
Investing activities:
Purchases of property and equipment			(12,399	)		(14,868	)
Purchase of intangible assets			(1,564	)		(683	)
Purchase of marketable securities			(102,197	)		(123,506	)
Redemption of marketable securities			153,924			51,899
Change in restricted cash			(4	)		(14	)
Net cash paid for acquisition of businesses and other intangibles			(68,902	)		-
Net cash used in investing activities			(31,142	)		(87,172	)
Financing activities:
Proceeds from issuance of common stock			2,842			6,671
Stock repurchase			-			-
Payments on long term debt			(14	)		-
Tax benefit related to stock option exercise			2,190			4,371
Net cash provided by financing activities			5,018			11,042
Effect of exchange rate changes on cash and cash equivalents			(487	)		185
Net increase in cash and cash equivalents			142,059			(19,729	)
Cash and cash equivalents at beginning of period			337,321			334,352
Cash and cash equivalents at end of period		$	479,380		$	314,623

 

See accompanying notes.

 

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Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 31, 2007

(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. Operating results for the 13-week period ended March 31, 2007 are not necessarily indicative of the results that may be expected for the year ending December 29, 2007.

The condensed consolidated balance sheet at December 30, 2006 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 30, 2006.

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 31, 2007 and April 1, 2006 both contain operating results for 13-weeks for both year-to-date periods.

Stock Split (“Split”)

All April 1, 2006 common stock and applicable share and per share amounts have been retroactively adjusted to reflect a 2-for-1 split of the Company’s Common Stock effective August 15, 2006.

2. Inventories

The components of inventories consist of the following:

		March 31, 2007			December 30, 2006
Raw materials		$	81,187		$	85,040
Work-in-process			43,248			42,450
Finished goods			176,373			160,748
Inventory reserves			(17,608	)		(17,230	)
Inventory, net of reserves		$	283,200		$	271,008

 

3. Stock Purchase Plan 

The Board of Directors approved a share repurchase program on August 3, 2006, authorizing the Company to purchase up to 3.0 million shares of Garmin Ltd.’s common stock as market and business conditions warrant. The share repurchase authorization expires on December 31, 2007. There were no shares purchased during the 13-week period ending March 31, 2007.

 

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4. Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):

		13-Weeks Ended
		March 31,			April 1,
		2007			2006
Numerator:
Numerator for basic and diluted net income
per share - net income		$	139,860		$	87,516
Denominator:
Denominator for basic net income per share -
weighted-average common shares			216,215			216,370
Effect of dilutive securities -
employee stock options			2,489			1,952
Denominator for diluted net income per share -
adjusted weighted-average common shares			218,704			218,322
Basic net income per share		$	0.65		$	0.40
Diluted net income per share		$	0.64		$	0.40

 

Options to purchase 2,391,766 shares of common stock were outstanding for the 13-week period ended March 31, 2007 but were not included in the computation of diluted earnings per share because the effect was anti-dilutive. There were no anti-dilutive options for the 13-week period ended April 1, 2006.

5. Comprehensive Income

Comprehensive income is comprised of the following (in thousands):

		13-Weeks Ended
		March 31,			April 1,
		2007			2006
Net income		$	139,860		$	87,516
Translation adjustment			(12,881	)		9,209
Change in fair value of available-for-sale
marketable securities, net of deferred taxes			1,817			(2,844	)
Comprehensive income		$	128,796		$	93,881

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6.	Segment Information

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

		Reportable Segments
		Outdoor/						Auto/
		Fitness			Marine			Mobile			Aviation			Total
13-Weeks Ended March 31, 2007
Net sales		$	60,527		$	43,004		$	316,626		$	72,002		$	492,159
Operating income		$	21,209		$	11,294		$	79,525		$	26,296		$	138,324
Income before taxes		$	24,783		$	13,085		$	95,145		$	27,894		$	160,907
13-Weeks Ended April 1, 2006
Net sales		$	63,645		$	50,703		$	150,730		$	57,233		$	322,311
Operating income		$	24,679		$	18,914		$	36,292		$	20,228		$	100,113
Income before taxes		$	24,157		$	20,646		$	39,239		$	19,527		$	103,569

 

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 long-lived assets (property and equipment) by geographic area are as follows as of and for the 13-week periods ended March 31, 2007 and April 1, 2006:

		North
		America			Asia			Europe			Total
March 31, 2007
Net sales to external customers		$	322,624		$	21,460		$	148,075		$	492,159
Long-lived assets		$	154,962		$	62,895		$	40,078		$	257,935
April 1, 2006
Net sales to external customers		$	202,687		$	17,721		$	101,903		$	322,311
Long-lived assets		$	135,945		$	52,448		$	427		$	188,820

 

7. Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48), on December 31, 2006, the beginning of fiscal year 2007. As a result of the implementation of FIN 48, the Company has not recognized a material increase or decrease in the liability for unrecognized tax benefits. The total amount of unrecognized tax benefits as of the date of adoption is $70.5 million including interest of $3.3 million. The total amount of unrecognized tax benefits as of March 31, 2007 is $76.4 million including interest of $6.9 million. The March 31, 2007 balance of $76.4 million of unrecognized tax benefits, if recognized, would reduce the effective tax rate. None of the unrecognized tax benefits are due to uncertainty in the timing of deductibility.

FIN 48 requires unrecognized tax benefits to be classified as non-current liabilities, except for the portion that is expected to be paid within one year of the balance sheet date. The Company previously classified these amounts as current liabilities, however after the adoption, the entire $76.4 million is required to be classified as non-current at March 31, 2007.

Interest expense and penalties, if any, accrued on the unrecognized tax benefits are reflected in income tax expense. Approximately $3.6 million of interest is included in income tax expense for the quarter ending March 31, 2007. At March 31, 2007 and at December 30, 2006, the Company had accrued approximately $6.9 million and $3.3 million respectively for interest. The Company had no amounts accrued for penalties as the nature of the unrecognized tax benefits, if recognized, would not warrant the imposition of penalties.

 

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The Company files income tax returns in the U.S federal jurisdiction, and various state and foreign jurisdictions. The Company is no longer subject to US federal, state, or local tax examinations by tax authorities for years prior to 2003. The Company also considers 2003 and 2004 US Federal returns to have been effectively settled due to the completion of audit examination by the Internal Revenue Service. The Company is no longer subject to Taiwan income tax examinations by tax authorities for years prior to 2001. The Company is no longer subject to United Kingdom tax examinations by tax authorities for years prior to 2005.

The Company believes that it is reasonably possible that $5.0 million of its unrecognized tax benefit will decrease within the next 12 months as the result of the statute of limitations expiring related to an uncertain tax benefit associated with transfer pricing. This potential decrease in unrecognized tax benefits would impact the Company’s effective tax rate within the next 12 months.

 

8. 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 31,			April 1,
		2007			2006
Balance - beginning of the period		$	37,639		$	18,817
Accrual for products sold
during the period			15,035			6,133
Expenditures			(13,393	)		(4,771	)
Balance - end of the period		$	39,281		$	20,179

 

9.	Commitments

Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $431 million over the next 3 years.

10.	Recent Accounting Pronouncements

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company will be required to adopt SFAS No. 157 in the first quarter of fiscal year 2008.   We do not expect the adoption of SFAS No. 157 to have a material impact on our financial reporting and disclosure.

In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities.” SFAS No. 159 allows entities the option to measure eligible financial instruments at fair value as of specified dates. Such election, which may be applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, and early application is allowed under certain circumstances. Management is currently evaluating the requirements of SFAS No. 159 and has not yet determined the impact, if any, on the Company’s consolidated financial statements.

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11.	Acquisitions

In the first quarter of 2007, Garmin Ltd. acquired EME Tec Sat SAS (the exclusive distributor of Garmin’s consumer products in France and now renamed Garmin France SAS), Digital Cyclone, Inc. (a location based services provider), and the assets of Nautamatic Marine Systems, Inc. (a manufacturer of the TR-1 Gold and Gladiator marine autopilots) for $72.1 million less $3.2 million cash acquired. The preliminary purchase price allocation resulted in an increase in goodwill and intangible assets of $68.6 million. These acquisitions are not material, either individually or in aggregate, therefore supplemental pro forma information is not presented.

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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 30, 2006. 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 30, 2006.

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 four 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 four segments may vary significantly. As such, the segments are managed separately.

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Results of Operations

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

		13-Weeks Ended
		March 31, 2007			April 1, 2006
Net sales			100.0	%		100.0	%
Cost of goods sold			51.7	%		49.5	%
Gross profit			48.3	%		50.5	%
Research and development			6.8	%		7.7	%
Selling, general and administrative			13.4	%		11.7	%
Total operating expenses			20.2	%		19.4	%
Operating income			28.1	%		31.1	%
Other income (expense), net			4.6	%		1.1	%
Income before income taxes			32.7	%		32.2	%
Provision for income taxes			4.3	%		5.0	%
Net income			28.4	%		27.2	%

 

The company manages its operations in four 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, gross profit, and operating profit for each of our four 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.

		Reporting Segments
		Outdoor/						Auto/
		Fitness			Marine			Mobile			Aviation			Total
13-Weeks Ended March 31, 2007
Net sales		$	60,527		$	43,004		$	316,626		$	72,002		$	492,159
Gross profit		$	33,415		$	21,153		$	136,731		$	46,453		$	237,752
Operating income		$	21,209		$	11,294		$	79,525		$	26,296		$	138,324
13-Weeks Ended April 1, 2006
Net sales		$	63,645		$	50,703		$	150,730		$	57,233		$	322,311
Gross profit		$	36,342		$	28,017		$	63,087		$	35,344		$	162,790
Operating income		$	24,679		$	18,914		$	36,292		$	20,228		$	100,113

 

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Comparison of 13-Weeks Ended March 31, 2007 and April 1, 2006

Net Sales

		13-weeks ended March 31, 2007						13-weeks ended April 1, 2006						Quarter over Quarter
		Net Sales			% of Revenues			Net Sales			% of Revenues			$ Change			% Change
Outdoor/Fitness		$	60,527			12.3	%	$	63,645			19.7	%		($3,118	)		-4.9	%
Marine			43,004			8.7	%		50,703			15.7	%		(7,699	)		-15.2	%
Automotive/Mobile			316,626			64.4	%		150,730			46.8	%		165,896			110.1	%
Aviation			72,002			14.6	%		57,233			17.8	%		14,769			25.8	%
Total		$	492,159			100.0	%	$	322,311			100.0	%	$	169,848			52.7	%

Increases in sales for the 13-week period ended March 31, 2007 were primarily due to a strong response to automotive and aviation product offerings. Approximately 45% of sales in the first quarter of 2007 were generated from products introduced in the last twelve months. Automotive/mobile revenue became a significantly larger portion of our revenue mix, rising from 47% in the year ago quarter to 64% in the first quarter of 2007.

Total unit sales increased 67% to 1,551,000 in the first quarter of 2007 from 921,000 in the same period of 2006. The higher unit sales volume in the first quarter of fiscal 2007 was attributable to strong sales of automotive products during the seasonally lower first quarter.

Automotive/mobile segment revenue grew the fastest during the quarter, more than doubling from the year-ago quarter, on the strength of nüvi, c-series, and other personal navigation devices (PNDs). Our aviation segment also performed well, as demand for our GMX 200, WAAS-enabled retrofit products, and WAAS upgrades to previously installed products were all strong. The timing of marine product releases and continued efforts to clear the marine retail channel of older products resulted in lower revenues for the segment when compared with the same quarter of 2006. Revenues in our outdoor/fitness segment were also lower than the year ago quarter, when outdoor product special program sales in Europe created strong sales in the first quarter of 2006.

Gross Profit

		13-weeks ended March 31, 2007						13-weeks ended April 1, 2006						Quarter over Quarter
		Gross Profit			% of Revenues			Gross Profit			% of Revenues			$ Change			% Change
Outdoor/Fitness		$	33,415			55.2	%	$	36,342			57.1	%		($2,927	)		-8.1	%
Marine			21,153			49.2	%		28,017			55.3	%		(6,864	)		-24.5	%
Automotive/Mobile			136,731			43.2	%		63,087			41.9	%		73,644			116.7	%
Aviation			46,453			64.5	%		35,344			61.8	%		11,109			31.4	%
Total		$	237,752			48.3	%	$	162,790			50.5	%	$	74,962			46.0	%

Gross profit dollars in the first quarter of 2007 grew 46% and gross profit margin percentage declined 220 basis points over the same quarter of the previous year. First quarter gross profit margins decreased to 55.2% and 49.2% in the outdoor/fitness and marine segments respectively, when compared to the same quarter in 2006. First quarter 2007 gross profit margins increased to 43.2% and 64.5% within the automotive/mobile and aviation segments, when compared with the first quarter of 2006.

Gross profit margin percentage for the Company overall decreased primarily as a result of the automotive/mobile segment becoming a significantly larger percentage of the Company’s product mix. While the automotive/mobile segment is by nature a lower-margin business, strong sales of our higher priced and more fully featured products coupled with a less aggressive pricing environment for the segment supported gross margin improvement and gross margin dollar growth within the segment. Declines in gross margin in both the outdoor/fitness and marine segments also pressured gross margins for the Company during the quarter. Continued efforts to clear the marine retail channel by discounting older products put particular pressure on marine margins. Strong demand for popular retrofit products in the aviation segment resulted in improved product mix and margins for the aviation segment, providing gross margin support for the Company.

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Selling, General and Administrative Expenses

		13-weeks ended March 31, 2007						13-weeks ended April 1, 2006
		Selling, General &						Selling, General &						Quarter over Quarter
		Admin. Expenses			% of Revenues			Admin. Expenses			% of Revenues			$ Change			% Change
Outdoor/Fitness		$	7,289			12.0	%	$	6,946			10.9	%	$	343			4.9	%
Marine			6,037			14.0	%		5,954			11.7	%		83			1.4	%
Automotive/Mobile			45,814			14.5	%		19,529			13.0	%		26,285			134.6	%
Aviation			6,785			9.4	%		5,335			9.3	%		1,450			27.2	%
Total		$	65,925			13.4	%	$	37,764			11.7	%	$	28,161			74.6	%

 

The increase in expense was driven primarily by increased advertising spending and increased staffing to support our growth. Advertising spending, which included increases in both cooperative advertising costs and television and print advertising placements, increased 59% or $10.9 million when compared to the first quarter of 2006. As a percent of sales, advertising increased from 5.7% of sales in first quarter of 2006 to 6.0% of sales in first quarter of 2007. Other selling, general and administrative expenses increased as a percent of sales from 6.0% of sales in the first quarter of 2006 to 7.4% of sales in the first quarter of 2007. In absolute dollars, other expenses increased $17.2 million when compared to the previous year quarter, with increases distributed across call center, operations, finance, administration, and marketing administration areas to support the growth of our businesses.

Research and Development Expense

		13-weeks ended March 31, 2007						13-weeks ended April 1, 2006
		Research &			% of			Research &			% of			Quarter over Quarter
		Development			Revenues			Development			Revenues			$ Change			% Change
Outdoor/Fitness		$	4,917			8.1	%	$	4,717			7.4	%	$	200			4.2	%
Marine			3,822			8.9	%		3,149			6.2	%		673			21.4	%
Automotive/Mobile			11,392			3.6	%		7,266			4.8	%		4,126			56.8	%
Aviation			13,372			18.6	%		9,781			17.1	%		3,591			36.7	%
Total		$	33,503			6.8	%	$	24,913			7.7	%	$	8,590			34.5	%

 

The 34.5% increase in research and development expense dollars was due to ongoing development activities for new products, the addition of 70 new engineering personnel to our staff during the quarter, and an increase in engineering program costs during the first quarter of 2007 as a result of our continued emphasis on product innovation. Research and development costs increased $8.6 million when compared with the year-ago quarter, but declined 90 basis points as a percent of revenue primarily due to the fact that the growth rate of research and development expenditures for the period (34.5%) was slower than the growth rate of revenues (52.7%).

Operating Income

 

		13-weeks ended March 31, 2007						13-weeks ended April 1, 2006						Quarter over Quarter
		Operating Income			% of Revenues			Operating Income			% of Revenues			$ Change			% Change
Outdoor/Fitness		$	21,209			35.0	%	$	24,679			38.8	%		($3,470	)		-14.1	%
Marine			11,294			26.3	%		18,914			37.3	%		(7,620	)		-40.3	%
Automotive/Mobile			79,525			25.1	%		36,292			24.1	%		43,233			119.1	%
Aviation			26,296			36.5	%		20,228			35.3	%		6,068			30.0	%
Total		$	138,324			28.1	%	$	100,113			31.1	%	$	38,211			38.2	%

Operating income was down 300 basis points as a percent of revenue when compared to the year-ago quarter due to the decline in gross margins, increased advertising and marketing activities, additions to finance, technology, and administrative expenditures, and personnel additions in the call center to support the growth of our businesses. Operating margins decreased to 35.0% and 26.3% within our outdoor/fitness and marine segments, respectively, while operating margins increased to 25.1% and 36.5% within our automotive/mobile and aviation segments, respectively. Our operating margin percentage decreased in part as a function of the gross profit margin percentage decreases described above, and the fact that marine and outdoor/fitness segment revenues and gross margins declined while R&D costs for these segments continued to grow to support upcoming new product introductions.

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Other Income (Expense)

 

		13-weeks ended			13-weeks ended
		March 31, 2007			April 1, 2006
Interest Income		$	9,359		$	7,305
Interest Expense			(32	)		(8	)
Foreign Currency Exchange			13,205			(7,446	)
Other			51			3,605
Total		$	22,583		$	3,456

 

The average taxable equivalent interest rate return on invested cash during the first quarter of 2007 was 4.3% compared to 4.0% during the same quarter of 2006. The increase in interest income is attributable to our growing cash balances, increasing interest rates, and more active management of our cash balances.

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, and secondarily to the British Pound Sterling. While the Canadian dollar and the Euro are the respective functional currencies of Dynastream Innovations, Inc. and Garmin France, due to these entities relative sizes, their respective currency moves do not have a material impact on the Company’s financial statements.

The majority of the $13.2 million currency gain in the first quarter of 2007 was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar. During the first quarter of fiscal 2007 the exchange rate increased 1.5% to $33.09 TD/USD at March 31, 2007 from $32.60 TD/USD at December 30, 2006, resulting in $12.1 million of the quarter’s gain. While the British Pound Sterling strengthened relative to the U.S. Dollar during the quarter, the timing of transactions during the period resulted in Garmin Europe recording a $1.0 million gain.

The $7.4 million currency loss in the same quarter of 2006 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar during the first quarter of fiscal 2006, when the exchange rate decreased to $32.46 TD/USD at April 1, 2006 from $32.84 TD/USD at December 31, 2005. During the first quarter of 2006, British Pound Sterling currency moves had no material impact, and Dynastream and Garmin France had not yet been acquired.

Income Tax Provision

 

Our earnings before taxes increased 55% when compared to the same quarter in 2006, and our income tax expense increased by $5.0 million, to $21.0 million, for the 13-week period ended March 31, 2007, from $16.0 million for the 13-week period ended April 1, 2006, due to our lower tax rate. The effective tax rate was 13.1% in the first quarter of 2007 and 15.5% in the first quarter of 2006. The lower tax rate in the first quarter of 2007 when compared to the same quarter in 2006 was related to tax holidays/credits and the favorable mix of taxable income among Company entities.

Net Income

As a result of the above, net income increased 60% for the 13-week period ended March 31, 2007 to $139.9 million compared to $87.5 million for the 13-week period ended April 1, 2006.

Liquidity and Capital Resources

Net cash generated by operating activities was $168.7 million for the 13-week period ended March 31, 2007 compared to $56.2 million for the 13-week period ended April 1, 2006. We attempt to carry sufficient inventory levels of finished goods and key components so that potential supplier shortages have as minimal an impact as possible on our ability to deliver our finished products. We experienced a $12.2 million year-to-date increase in net inventories in this 13-week period of 2007, an increase required to fill strong orders for our products and to address overall growing demand for our products. Accounts receivable decreased $84.9 million, net of bad debts, during the first quarter of 2007 due to lower shipments in the seasonally slower period.

Cash flow used in investing activities during the 13-week period ending March 31, 2007 was $31.1 million. Cash flow used in investing activities principally related to $12.4 million in capital expenditures primarily related to business operation and maintenance activities, the net purchase of $51.7 million of fixed income securities associated with the investment of our on-hand cash balances, and the purchase of EME Tec Sat SAS. and Digital Cyclone, Inc., and the purchase of the assets of Nautamatic Marine Systems for a combined total of $68.9 million. It is management’s goal to invest the on-hand cash consistent with the Company’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 maximum safety. The Company’s average taxable equivalent return on its investments during the period was approximately 4.3%.

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Net cash provided by financing activities during the period was $5.0 million resulting from issuance of common stock related to our Company stock option plan and stock based compensation tax benefits.

We currently use cash flow from operations to fund our capital expenditures and to support our working capital requirements. We expect that future cash requirements will principally be for capital expenditures, working capital requirements, repurchase of shares, and payment of dividends declared.

We believe that our existing cash balances and cash flow from operations will be sufficient to meet our projected capital expenditures, working capital, repurchase of shares, and other cash requirements at least through the end of fiscal 2007.

 

Contractual Obligations and Commercial Commitments

Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $431 million over the next 3 years.

 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

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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 introducing new products with higher margins and success in obtaining price reductions in raw material costs. In recent quarters we have experienced an increase in raw materials costs and an increase in the sale of lower-margin products as a part of the product mix, resulting in reduced gross margins.

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 Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, 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 functional currency of Garmin Ltd. and Garmin International, Inc. Sales, costs, and expenses are translated at rates prevailing during the reporting periods and at end-of-year rates for all assets and liabilities. The effect of this translation is recorded in a separate component of stockholders’ equity and have been included in accumulated other comprehensive gain/(loss) in the accompanying consolidated balance sheets.

Foreign currency gains and losses for the Company are primarily tied to movements of the Taiwan Dollar, which is the functional currency of Garmin Corporation, located in Taiwan, and secondarily to the British Pound Sterling, which is used by Garmin Europe, located in Southampton in the U.K. While the Canadian dollar and the Euro are the functional currencies of Dynastream Innovations, Inc. and Garmin France, due to these entities relative sizes, their respective currency moves do not have a material impact on the Company’s financials.  

Interest Rate Risk

As of March 31, 2007, we have minimal interest rate risk as we have no material outstanding long term debt and we intend to hold marketable securities until they mature.

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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 31, 2007, 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 31, 2007 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 31, 2007 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