For the quarterly period ended June 25, 2005
or
For the transition period from ______ to ______
Commission file number 0-31983_________________
Company’s telephone number, including area code: (345) 946-5203
No Changes
(Former name, former address and former fiscal year, if changed since last report)
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 [x] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [x] NO [ ]
Number of shares outstanding of the Company's common shares as of July 27, 2005:Common Shares, $.01 par value 107,823,130
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Part I — Financial Information Page
Part II — Other Information
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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 25, 2004. 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- and 26-week periods ended June 25, 2005 are not necessarily indicative of the results to be expected for the full year 2005.
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See accompanying notes.
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Garmin Ltd. And SubsidiariesCondensed Consolidated Statements of Income (Unaudited) (In thousands, except per share information)
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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- and 26-week periods ended June 25, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.
The condensed consolidated balance sheet at December 25, 2004 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 25, 2004.
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 June 25, 2005 and June 26, 2004 both contain operating results for 13 weeks.
The components of inventories consist of the following:
The Board of Directors approved a share repurchase program on April 21, 2004, 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 April 30, 2006. From inception to date, 385,800 shares have been repurchased and retired under this plan as of June 25, 2005. These amounts have been reported as a reduction in additional paid-in capital because companies incorporated in the Cayman Islands are not permitted by law to hold treasury stock.
Garmin had no long-term debt as of June 25, 2005 or December 25, 2004.
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The following table sets forth the computation of basic and diluted net income per share (in thousands, except per share information):
There were 539,810 antidilutive options for the 13-week period and 26-week period ended June 25, 2005.
8
Comprehensive income is comprised of the following (in thousands):
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Revenues and income before income taxes for each of the Company’s reportable segments are presented below:
Revenues and long-lived assets (property and equipment) by geographic area are as follows for the 26-week periods ended June 25, 2005 and June 26, 2004:
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Accounting for Stock-Based Compensation
At June 25, 2005, the Company has three stock-based employee compensation plans. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. No stock-based employee compensation cost is reflected in net income, as all awards granted under those plans had a stated price equal to the market value of the underlying common stock on the date of grant, or at the balance sheet date. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation.
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2000 Non-employee Directors’ Option Plan
In October 2000, the stockholders adopted a stock option plan for non-employee directors (the Directors Plan) providing for grants of options for up to 50,000 common shares of the Company’s stock. The term of each award is ten years. All awards vest evenly over a three-year period. During 2005, 2004, and 2003, options to purchase 5,500, 6,621, and 3,648 shares, respectively, were granted under this plan.
2000 Equity Incentive Plan
Also in October 2000, the stockholders adopted an equity incentive plan (the Plan) providing for grants of incentive and nonqualified stock options and “other” stock compensation awards to employees of the Company and its subsidiaries, pursuant to which up to 3,500,000 shares of common stock are available for issuance. The stock options generally vest over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. Option activity under the Plan during the first two quarters of 2005, and full year 2004 is summarized below. There have been no “other” stock compensation awards granted under the Plan.
2005 Equity Incentive Plan
Also in June 2005, the stockholders adopted an equity incentive plan (the 2005 Plan) providing for grants of incentive and nonqualified stock options and “other” stock compensation awards to employees of the Company and its subsidiaries, pursuant to which up to 5,000,000 shares of common stock are available for issuance. The stock options generally vest over a period of five years or as otherwise determined by the Board of Directors or the Compensation Committee and generally expire ten years from the date of grant, if not exercised. Award activity under the 2005 Plan during the second quarter of 2005 is summarized below. The Company awarded certain stock appreciation rights (SAR’s) during the second quarter under the Plan.
A summary of the Company’s stock award activity and related information under the Plan, the 2005 Plan and the Directors’ Plan for the 26-week period ended June 25, 2005 and year ended December 25, 2004 is provided below:
The stated stock price for SAR’s issued is reflected in the above table as the exercise price.
There were 381,225 and 13,292 awards granted during the 13-week periods ended June 25, 2005 and June 26, 2004, respectively.
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The weighted-average remaining contract life for options outstanding at June 25, 2005 is 7.85 years. Options outstanding at June 25, 2005 have exercise prices ranging from $14.00 to $54.54. At June 25, 2005, options to purchase 842,866 shares are exercisable.
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.
Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $90 million over the next 3 years.
On July 20, 2005, the board of directors of the Company approved a $0.50/share annual dividend payable to shareholders of record on December 1, 2005.
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In December 2004, the FASB issued SFAS No. 123(R), “Share-Based Payment”, which is a revision of SFAS No. 123. SFAS No.123 (R) will be effective for the Company during the first quarter of 2006 and requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. As permitted by SFAS No. 123, the company currently accounts for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognizes no compensation cost for employee stock options at the date of grant. Accordingly, the adoption of SFAS No.123(R)’s fair value method will have an impact on our results of operations consistent with our pro-forma disclosures included in Note 8, although it will have no impact on our overall financial position. The full impact of adoption of SFAS No.123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future. However, had we adopted SFAS No.123(R) in prior periods, the impact of that standard would have approximated the impact of SFAS No.123 as described in the disclosure of pro forma net income and earnings per share as noted above. SFAS No.123(R) also requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption.
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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 25, 2004. 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 25, 2004.
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 two business segments, the consumer and aviation markets. Both of our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the two segments vary significantly. As such, the segments are managed separately. Our consumer segment includes portable GPS receivers and accessories for marine, recreation, land and automotive use sold primarily to retail outlets. Our aviation products are portable and panel-mount avionics for Visual Flight Rules and Instrument Flight Rules navigation and are sold primarily to retail outlets and certain aircraft manufacturers.
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The following table sets forth our results of operations as a percentage of net sales during the periods shown:
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The following table sets forth our results of operations (in thousands) for each of our two segments through income before income taxes during the periods shown. For each line item in the table, the total of the consumer and aviation segments’ amounts equals the amount in the condensed consolidated statements of income included in Item 1.
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Net Sales
Increases in consumer sales for the 13-week period ended June 25, 2005 were primarily due a strong response to new automotive product offerings and secondarily to continued demand for marine and recreation products. Increases in aviation sales were due to revenues from OEM and retrofit panel-mount products partially offset by a reduction in portable product sales for the 13-week period ended June 25, 2005. Approximately 38% of sales in the second quarter of 2005 were generated from products introduced in the last twelve months.
Total consumer and aviation unit sales increased 24% to 707,000 in the second quarter of 2005 from 569,000 in the same period of 2004. The higher unit sales volume in the second quarter of fiscal 2005 was primarily attributable to the introduction of new products in the prior twelve months, most notably automotive products, as well as strength in our existing product lines. Unit growth in both consumer and aviation segments exceeded 20%.
Gross Profit
Gross profit improvements within the consumer segment in the quarter ended June 25, 2005, when compared to the same quarter in 2004, were driven primarily by improved product mix within the segment.
Aviation gross margin improvements were primarily a result of favorable product mix and reduced G1000 cockpit program costs versus the same quarter of 2004.
Selling, General and Administrative Expenses
The increase in expense was driven primarily by increased advertising costs ($7.5 million), certain operating taxes ($3.8 million), legal and accounting fees ($1.0 million), increased call center expense ($0.5 million) and other administrative expenses ($0.9 million).
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Research and Development Expense
The increase in expense was due to ongoing development activities for new products, the addition of 46 new engineering personnel to our staff during the quarter and an increase in engineering program costs during the second quarter of 2005 as a result of our continued emphasis on product innovation. Research and development costs as a percent of revenue declined primarily due to the fact that the growth rate of revenues for the period (39%) exceeded the growth rate of research and development expenditures (21%).
Operating Income
Operating income fell as a percent of revenue as a result of product mix, increased advertising costs, operating taxes, legal and accounting fees, and increased call center costs.
Other Income (Expense)
The average taxable equivalent interest rate return on invested cash during the second quarter of 2005 was 2.9% compared to 1.5% during the same quarter of 2004.
The $1.5 million currency loss was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar during the second quarter of fiscal 2005, when the exchange rate decreased to 31.36 TD/USD at June 25, 2005 from 31.49 TD/USD at March 26, 2005. The $3.6 million gain in the same quarter of 2004 was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar during the second quarter of fiscal 2004, when the exchange rate increased to 33.68 TD/USD at June 26, 2004 from 33.27 TD/USD at March 27, 2004.
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Income Tax Provision
Income tax expense increased by $4.3 million, to $17.8 million, for the 13-week period ended June 25, 2005 from $13.5 million for the 13-week period ended June 26, 2004 due to our higher income before taxes. The effective tax rate was 19.4% in both the second quarter of 2005 and the second quarter of 2004.
Net Income
As a result of the above, net income increased 31.8% for the 13-week period ended June 25, 2005 to $74.2 million compared to $56.3 million for the 13-week period ended June 26, 2004.
Increases in consumer sales dollars for the 26-week period ended June 25, 2005 were primarily due to a strong response to new automotive product offerings during the second quarter and secondarily to continued demand for marine and recreation products throughout the period. Increases in aviation sales were due to revenues from OEM and retrofit panel-mount products for the 26-week period ended June 25, 2005. Aviation revenues as a percent of total revenue increased due to the fact that the growth rate of aviation revenues for the period (44%) exceeded the growth rate of the consumer segment (28%).
Total consumer and aviation unit sales increased 23% to 1,290,000 in the first half of 2005 from 1,047,000 in the same period of 2004. The higher unit sales volume in the first half of fiscal 2005 was primarily attributable to the introduction of new products in the prior twelve months, as well as strength in our existing product lines. Unit growth occurred in both consumer and aviation segments.
Gross profit improvements within the consumer segment in the period ended June 25, 2005, when compared to the same quarter in 2004, were driven primarily by improved product mix within the segment.
Aviation gross margin improvements were primarily a result of favorable product mix and reduced G1000 cockpit program costs versus the same period of 2004.
The increase in expense was driven primarily by increased advertising costs ($9.9 million), certain operating taxes ($3.8 million), legal and accounting fees ($1.7 million), increased call center expense ($0.8 million) and other administrative expenses ($1.3 million).
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The increase in expense dollars was due to ongoing development activities for new products, the addition of 74 new engineering personnel to our staff year to date, and an increase in engineering program costs during the first half of 2005 as a result of our continued emphasis on product innovation. Research and development costs as a percent of revenue declined primarily due to the fact that the growth rate of revenues for the period (31%) exceeded the growth rate of research and development expenditures (20%).
Operating income rose as a percent of revenue as a result of favorable product mix shift, offset in part by increased research and development costs, increased advertising and marketing costs, certain operating taxes, legal and accounting fees, and increased call center costs.
The average taxable equivalent interest rate return on invested cash during the first half of 2005 was 2.8% compared to 1.5% during the same period of 2004.
The $12.6 million currency loss was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar during the first half of fiscal 2005, when the exchange rate decreased to 31.36 TD/USD at June 25, 2005 from 32.19 TD/USD at December 25, 2004. The $3.9 million currency loss in the same period of 2004 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar during the first half of fiscal 2004, when the exchange rate decreased to 33.68 TD/USD at June 26, 2004 from 34.05 TD/USD at December 27, 2003.
Income tax expense increased by $6.6 million, to $29.3 million, for the 26-week period ended June 25, 2005 from $22.7 million for the 26-week period ended June 26, 2004 due to our higher income before taxes. The effective tax rate fell to 19.4% from 20.0% due to incremental tax holidays applied for in Taiwan during 2004 and the first half of 2005.
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As a result of the above, net income increased 33.6% for the 26-week period ended June 25, 2005 to $121.6 million compared to $91.0 million for the 26-week period ended June 26, 2004.
Net cash generated by operating activities was $89.4 million for the 26-week period ended June 25, 2005 compared to $100.4 million for the 26-week period ended June 26, 2004. 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 $5.3 million year-to-date increase in inventories in the first half of 2005 in order to support the many new products slated for 2005 and meet demand for our products. Accounts receivable increased $44.6 million for the first half of 2005 due to heavier shipments in June, resulting in the higher receivables balance at the end of the period.
Cash flow from investing activities during the 26-week period ending June 25, 2005 was a $30.1 million use of cash. Cash flow used in investing activities principally related to $15.8 million in capital expenditures primarily related to business operation and maintenance activities, the net purchase of $14.1 million of fixed income securities associated with the investment of our on-hand cash balances, and the payment of prepaid license fees of $0.2 million as a result of long-term agreements with key suppliers to achieve favorable pricing. 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 2.8%.
Cash flow from financing activities during the period was a $9.5 million use of cash, which represents a use of cash for share repurchase of $12 million and a source of cash resulting from the issuance of common stock related to our Company stock option plan of $2.5 million.
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 2005.
Contractual Obligations and Commercial Commitments
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Market Sensitivity
We have market risk primarily in connection with the pricing of our products and services and the purchase of raw materials. Product pricing and raw material costs are both significantly influenced by semiconductor market conditions. Historically, during cyclical economic downturns, we have been able to offset pricing declines for our products through a combination of improved product mix and success in obtaining price reductions in raw material costs. 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.
The principal currency involved is the Taiwan Dollar. Garmin Corporation, located in Shijr, Taiwan, uses the local currency as its functional currency. The Company translates all assets and liabilities at year-end exchange rates and income and expense accounts at average rates during the year. In order to minimize the effect of the currency exchange fluctuations on our operations, we have elected to retain most of our cash at our Taiwan subsidiary in U.S. dollars. As discussed above, the exchange rate decreased 2.6% during the first six months of 2005 and resulted in a foreign currency loss of $12.6 million. If the exchange rate increased by a similar percentage, a comparable foreign currency gain would be recognized.
As of June 25, 2005, we have minimal interest rate risk as we have no outstanding long term debt and we intend to hold marketable securities until they mature.
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(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 June 25, 2005, 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 June 25, 2005 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 June 25, 2005 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Election of Three Directors of the Company:
Nominee For Withheld
Donald H. Eller 106,331,899 170,995 Charles W. Peffer 106,291,504 211,350 Clifton A. Pemble 103,718,432 2,784,422
The terms of office of Directors Charles W. Peffer and Min H. Kao will continue until the Annual General Meeting of Shareholders in 2006. The terms of office of Directors Gene M. Betts and Thomas A. McDonnell will continue until the Annual General Meeting of Shareholders in 2007. The terms of office of Directors Donald H. Eller and Clifton A. Pemble will continue until the Annual General Meeting in 2008.
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Approval of the Garmin Ltd. 2005 Equity Incentive Plan
For Against Abstain Not Voted
76,257,451 5,261,487 49,668 24,934,248
Not applicable
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Exhibits
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Dated: August 3, 2005
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Exhibit No. Description Page
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EXHIBIT 31.1
I, Min H. Kao, certify that:
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EXHIBIT 31.2
I, Kevin Rauckman, certify that:
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EXHIBIT 32.1
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EXHIBIT 32.2
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