GARMIN LTD - Quarter Report: 2016 June (Form 10-Q)

United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended June 25, 2016

or

For the transition period from _____ to _____

Commission file number 0-31983

________________

GARMIN LTD.

(Exact name of Company as specified in its charter)

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 July 25, 2016

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

Garmin Ltd.

Form 10-Q

Quarter Ended June 25, 2016

Table of Contents

Part I - Financial Information

Item I - Condensed Consolidated Financial Statements

Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets

(In thousands, except per share information)

See accompanying notes.

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Income (Unaudited)

(In thousands, except per share information)

See accompanying notes.

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(In thousands)

See accompanying notes.

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

See accompanying notes.

Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

June 25, 2016

(In thousands, except per share information)

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Additionally, the condensed consolidated financial statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q. Operating results for the 13-week and 26-week periods ended June 25, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016.

The condensed consolidated balance sheet at December 26, 2015 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 26, 2015.

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 53-week 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 13-week quarters. The quarters ended June 25, 2016 and June 27, 2015 both contain operating results for 13 weeks. The Company’s fiscal quarter and year ending December 31, 2016 will contain operating results for 14 weeks and 53 weeks, respectively.

At the Company’s Annual General Meeting on June 10, 2016, the Company’s shareholders approved the cancellation of 10,000 registered shares of the Company held by the Company (the “Formation Shares”) and the reduction in par value of each share of the Company from CHF 10 to CHF 0.10 and the amendment of the Company’s Articles of Association to effect a corresponding share capital reduction. The Company expects to complete the cancellation of the Formation Shares and the reduction in par value of each share and the corresponding reduction of the Company’s issued share capital by the end of the third quarter of 2016.

The components of inventories consist of the following:

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

There were 3,873 and 3,558 anti-dilutive stock options, stock appreciation rights and restricted stock units (collectively “equity awards”) outstanding during the 13-week periods ended June 25, 2016 and June 27, 2015, respectively.

There were 4,231 and 3,598 anti-dilutive equity awards outstanding during the 26-week periods ended June 25, 2016 and June 27, 2015, respectively.

There were 11 and 91 shares issued as a result of exercises and releases of equity awards for the 13-week periods ended June 25, 2016 and June 27, 2015, respectively.

There were 13 and 128 shares issued as a result of exercises and releases of equity awards for the 26-week periods ended June 25, 2016 and June 27, 2015, respectively.

There were 285 employee stock purchase plan (ESPP) shares issued from outstanding Treasury stock during the 13-week and 26-week periods ended June 25, 2016.

There were 214 ESPP shares issued from outstanding Treasury stock during the 13-week and 26-week periods ended June 27, 2015.

The Company has identified five reportable segments – Auto, Aviation, Marine, Outdoor and Fitness. The Company’s Chief Operating Decision Maker (CODM) assesses segment performance and allocates resources to each segment individually.

Net sales, gross profit, and operating income for each of the Company’s reportable segments are presented below. 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 13-weeks and 26-weeks ended June 27, 2015 have been recast to conform to the current year presentation.

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

Net sales and property and equipment, net by geographic area are as follows as of and for the 26-week periods ended June 25, 2016 and June 27, 2015. Note that APAC includes Asia Pacific and EMEA includes Europe, the Middle East and Africa:

The Company’s products sold are generally covered by a warranty for periods ranging from one to two years. The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectation of future conditions and are recorded as a liability on the balance sheet. The following reconciliation provides an illustration of changes in the aggregate warranty reserve.

The Company is party to certain commitments, which include purchases of raw materials, advertising expenditures, investments in certain low income housing tax credit projects, and other indirect purchases in connection with conducting our business. The aggregate amount of purchase orders and other commitments open as of June 25, 2016 was approximately $306,545. 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.

In the normal course of business, the Company and its subsidiaries are parties to various legal claims, investigations and complaints, including matters alleging patent infringement and other intellectual property claims. The Company evaluates, on a quarterly basis, developments in legal proceedings, investigations or claims that could affect the amount of any accrual or disclosure. The assessment regarding whether a loss is probable or a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events.

Management of the Company currently does not believe there is at least a reasonable possibility the Company may have incurred a material loss, or a material loss in excess of recorded accruals, with respect to loss contingencies individually and in the aggregate, for the fiscal quarter ended June 25, 2016. The results of legal proceedings, investigations and claims, however, cannot be predicted with certainty. Although management considers the likelihood to be remote, an adverse resolution of one or more of such matters in excess of management’s expectations could have a material adverse effect on the Company’s results of operations in a particular quarter or fiscal year.

The Company settled or resolved certain matters during the fiscal quarter ended June 25, 2016 that did not individually or in the aggregate have a material impact on the Company’s financial condition or results of operations.

7. Income Taxes

The Company’s income tax expense increased from $35,805 to $42,737 for the 13-week period ended June 25, 2016, compared to the 13-week period ended June 27, 2015.  The effective tax rate of 21.0% in the second quarter of 2016 is comparable to the 20.6% in the second quarter of 2015. The increase in the effective tax rate is due to shifts in the projected income mix by jurisdiction for 2016 compared to the same projection at second quarter of 2015. The increase in the effective tax rate was offset by the permanent extension of the U.S. research and development tax credit legislation, which had not yet been extended in the second quarter of 2015.

The Company’s income tax expense increased from $45,208 to $62,192 for the first half of 2016, compared to the first half of 2015.  The effective tax rate increased to 20.0% for the first half of 2016, compared to 18.1% in the first half of 2015 primarily due to shifts in the projected income mix by jurisdiction for 2016 compared to the same projection at second quarter of 2015. Additionally, the favorable release of uncertain tax position reserves due to expiration of certain statutes or completion of tax audits was $2,009 lower compared to the first half of 2015. The increase in the effective tax rate was partially offset as a result of the permanent extension of the U.S. research and development tax credit legislation, which had not yet been extended in the second quarter of 2015.

8. Marketable Securities

The Financial Accounting Standards Board ("FASB") ASC topic entitled Fair Value Measurements and Disclosures defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance classifies the inputs used to measure fair value into the following hierarchy:

  The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Valuation is based on prices obtained from an independent pricing vendor using both market and income approaches. The primary inputs to the valuation include quoted prices for similar assets in active markets, quoted prices for identical or similar assets in markets that are not active, contractual cash flows, benchmark yields, and credit spreads.

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

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

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

The Company’s investment policy requires investments to be rated A or better with the objective of minimizing the potential risk of principal loss. The fair value of the securities varies from period to period due to changes in interest rates, in the performance of the underlying collateral and in the credit performance of the underlying issuer, among other factors. The Company does not intend to sell the securities that have a material 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 2015 and the 26-week period ending June 25, 2016, the Company did not record any material impairment charges on its outstanding securities.

 The amortized cost and estimated fair value of the securities at an unrealized loss position at June 25, 2016 were $633,601 and $627,379 respectively. Approximately 30.4% of securities in our portfolio were at an unrealized loss position at June 25, 2016. 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 material 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 material impairment has been recorded in the accompanying condensed consolidated statement of income.

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

The following tables display additional information regarding gross unrealized losses and fair value by major security type for available-for-sale securities in an unrealized loss position as of June 25, 2016 and December 26, 2015:

The amortized cost and estimated fair value of marketable securities at June 25, 2016, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.

9. Share Repurchase Plan

On February 13, 2015, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $300,000 of the common shares of Garmin Ltd. The repurchases may be made from time to time as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The timing and amounts of any repurchases will be determined by the Company’s management depending on business and market conditions and other factors including price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. The share repurchase authorization expires on December 31, 2016.  As of June 25, 2016, the Company had repurchased 4,292 shares using cash of $176,510.  There remains approximately $123,490 available to repurchase additional shares under this authorization.

10. Accumulated Other Comprehensive Income

The following provides required disclosure of changes in accumulated other comprehensive income (AOCI) balances by component for the 13-week and 26-week periods ended June 25, 2016:

(3) Represents the change in impairment, not related to credit, for those investment securities that have been determined to be other-than-temporarily impaired.

(4) Represents the change in unrealized gains (losses) on investment securities that have not been determined to be other-than-temporarily impaired.

The following provides required disclosure of reporting reclassifications out of AOCI for the 13-week and 26-week periods ended June 25, 2016:

11. Recently Issued Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which supersedes previous revenue recognition guidance. ASU 2014-09 requires that a company will recognize revenue at an amount that reflects the consideration to which the company expects to be entitled in exchange for transferring goods or services to a customer. The new standard may be applied retrospectively to each prior period presented or in a modified retrospective approach in which the cumulative effect will be recognized as of the date of adoption. Additional updates to Topic 606 issued by the FASB in 2015 and 2016 include the following:

The Company is currently evaluating the impact of adopting the new revenue standards on its consolidated financial statements.

In January 2016, the FASB issued Accounting Standards Update No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The standard addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet. Lessor accounting is substantially unchanged compared to the current accounting guidance. ASU 2016-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), which is intended to simplify the accounting for share-based payment awards. The standard includes provisions addressing income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is permitted. The Company is currently evaluating the impact of adopting the new standard on its consolidated financial statements.

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 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 the Company’s assumptions prove incorrect or should unanticipated circumstances arise, 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 26, 2015. 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 website 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 26, 2015.

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

Results of Operations

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

The Company manages its operations in five segments: outdoor, fitness, marine, auto, and aviation, and each of its segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The segment table located in Note 4 sets forth the Company’s results of operations (in thousands) including net sales, gross profit, and operating income for each of the Company’s five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, auto, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.

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 13-weeks and 26-weeks ended June 27, 2015 have been recast to conform to the current year presentation.

Comparison of 13-weeks ended June 25, 2016 and June 27, 2015

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

Net Sales

Net sales increased 5% for the 13-week period ended June 25, 2016 when compared to the year-ago quarter. All segments, excluding Auto grew in the quarter. Auto revenue remains the largest portion of our revenue mix at 30% in the second quarter of 2016 compared to 39% in the second quarter of 2015.

Total unit sales increased to 4,209 in the second quarter of 2016 from 4,150 in the same period of 2015.

Auto segment revenue decreased 18% from the year-ago quarter, as both PND volumes and the contribution of amortization of previously deferred revenue declined when compared to second quarter 2015. Revenues in our fitness segment increased 34% from the year-ago quarter on the strength of activity trackers, running, and cycling products. Revenues in our outdoor segment increased 23% from the year-ago quarter primarily driven by growth in our wearable category and the newly acquired DeLorme product lines. Revenues in our marine segment increased 8% from the year-ago quarter due to increases within our inland fishing category. Aviation revenues increased 6% from the year-ago quarter primarily due to gains in OEM.

Cost of Goods Sold

Cost of goods sold decreased 300 basis points as a percentage of revenue from the year-ago quarter with decreases across all segments except fitness which was flat. In absolute dollars second quarter 2016 cost of goods sold was $5.9 million or 2% lower than the prior year quarter.

In the auto segment, the decrease of 21% in cost of goods sold reflects lower PND shipments.  In the fitness segment, the increase of 33% in cost of goods sold reflects strong volume growth.  In the outdoor and marine segments, the increases of 12% and 4% in cost of goods sold, respectively, reflects volume growth. The cost of goods sold for aviation was consistent year-over-year.

Gross Profit

Gross profit dollars in the second quarter of 2016 increased 10% while gross profit margin increased 300 basis points compared to the second quarter of 2015. All segments had increases in gross margin rate except fitness which was flat.

Advertising Expense

Advertising expense decreased 3% in absolute dollars and was relatively flat as a percent of revenues. The decrease in absolute dollars was primarily in auto and marine offset by increases in fitness and outdoor to support new product introductions with increased media spend and cooperative advertising.

Selling, General and Administrative Expense

Selling, general and administrative expense increased 6% in absolute dollars and was relatively flat as a percent of revenues compared to the year-ago quarter. The absolute dollar increase is primarily due to the increased expenses associated with the recently acquired Delorme business and compensation related costs. Variances by segment are primarily due to the allocation of certain selling, general and administrative expenses based on percentage of total revenues.

Research and Development Expense

Research and development expense increased 5% due to ongoing development activities for new products. In absolute dollars, research and development costs increased $5.1 million when compared with the year-ago quarter and were stable 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

Operating income increased 20% in absolute dollars and 320 basis points as a percent of revenue when compared to the second quarter of 2015. The increase in operating income is due to revenue growth and an improved gross margin percentage partially offset by an increase in operating expense.

Other Income (Expense)

The average return on cash and investments during the second quarter of 2016 was 1.4% compared to 1.2% during the same quarter of 2015. Higher interest income in the second quarter of 2016, as compared to the same period of 2015, is attributable to an increased rate of return on investments.

Foreign currency gains and losses for the Company are typically driven by movements in the Taiwan Dollar and the Euro in relation to the U.S. Dollar. The Taiwan Dollar is the functional currency of Garmin Corporation. The U.S. Dollar is the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most other 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 and the Euro, currency fluctuations related to these entities are not expected to have a material impact on the Company’s financial statements.

The $5.7 million currency loss in the second quarter of 2016 was primarily due to the weakening of the U.S. Dollar against the Taiwan Dollar. During the second quarter of 2016, the U.S. Dollar weakened 0.6% against the Taiwan Dollar, resulting in a loss of $4.6 million, while the U.S. Dollar strengthened 0.5% against the Euro, resulting in an additional loss of $0.4 million. The remaining net currency loss of $0.7 million is related to other currencies and timing of transactions.

The $0.5 million currency loss in the second quarter 2015 was due to the U.S. Dollar weakening against both the Taiwan Dollar and the Euro. During the second quarter of 2015, the U.S. Dollar weakened 2.8% compared to the Euro resulting in a gain of $6.0 million while the U.S. Dollar weakened against the Taiwan Dollar 0.6% resulting in a loss of $6.4 million. The remaining net currency loss of $0.1 million is related to other currencies and timing of transactions.

Income Tax Provision

The Company’s income tax expense increased from $35.8 million to $42.7 million for the 13-week period ended June 25, 2016, compared to the 13-week period ended June 27, 2015. The effective tax rate of 21.0% in the second quarter of 2016 is comparable to the 20.6% in the second quarter of 2015. The increase in the effective tax rate is due to shifts in the projected income mix by jurisdiction for 2016 compared to the same projection at second quarter of 2015. The increase in the effective tax rate was offset by the permanent extension of the U.S. research and development tax credit legislation, which had not yet been extended in the second quarter of 2015.

Net Income

As a result of the above, net income for the 13-weeks ended June 25, 2016 was $161.1 million compared to $137.8 million for the 13-week period ended June 27, 2015, an increase of $23.3 million.

Comparison of 26-Weeks Ended June 25, 2016 and June 27, 2015

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

Net Sales

Net sales increased 6% for the 26-week period ended June 25, 2016 when compared to the prior year period. All segments had an increase in revenue except for auto. Auto revenue remains the largest portion of our revenue mix at 31% in the first half of 2016 compared to 38% in the first half of 2015.

Total unit sales increased 4% to 7,516 in the first half of 2016 from 7,194 in the same period of 2015.

Auto segment revenue decreased 15% from the year-ago period, as both the volumes and the contribution of amortization of previously deferred revenue declined when compared to first half 2015. Outdoor revenue increased 27% primarily driven by growth in our wearables and the newly acquired DeLorme product lines. Fitness revenues increased 23% due to growth of our activity tracker, running, and cycling categories. Revenues in our marine segment increased 16% as the release of new marine products in multiple categories drove revenue growth against the first half of 2015. Aviation revenues increased 7% from the year-ago period primarily due to OEM growth.

Cost of Goods Sold

Cost of goods sold increased 6% in absolute dollars for the first half of 2016 when compared to the year ago period.

In the auto segment, the cost of goods decline was largely consistent with the segment revenue decline. In the fitness segment, the cost of goods increase outpaced revenue growth due to product mix. In the outdoor and marine segments, the cost of goods increases were in line with the revenue growth.

Gross Profit

Gross profit dollars in the first half of 2016 increased 5% while gross profit margin decreased 25 basis points compared to the first half of 2015. Fitness and auto margin declines were mostly offset by increased aviation margins and increased revenue while outdoor and marine held steady to the first half of 2015. All segment gross margin rates are relatively consistent between the first half of 2016 compared to the first half of 2015 except for the decrease in the fitness gross margin rate which is due to product mix.

Advertising Expense