Garmin - 10-Q quarterly report FY

or

Commission file number 0-31983

(Exact name of Company as specified in its charter)

(Former name, former address and former fiscal year, if changed since last report)

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.

Number of shares outstanding of the Company's common shares as of November 3, 2006

Common Shares, $.005 par value: 215,834,244

 

 

 

 

 

 

 

 

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 and 39-week periods ended September 30, 2006 are not necessarily indicative of the results that may be expected for the year ended December 30, 2006.

The condensed consolidated balance sheet at December 31, 2005 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 31, 2005.

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 September 30, 2006 and September 24, 2005 both contain operating results for 13-weeks, and 39-weeks for both year-to-date periods.

Stock Split (“Split”)

All prior period 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.

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 expired on April 30, 2006. From inception to expiration, 738,000 shares were repurchased and retired under this 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 1,155,300 shares purchased during the 13-weeks period ending September 30, 2006.

This amount was 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.

 

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

 

 

There were 1,153,121 anti-dilutive options for the 13-week period ended September 30, 2006.

There were 503,267 anti-dilutive options for the 39-week period ended September 30, 2006.

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

In the first quarter of 2006, the Company changed its internal reporting. Upon this change, it determined that it has four reportable segments. Prior periods have been reclassified to conform to the current period’s presentation.

Revenues, gross profit, and operating income for each of the Company’s reportable segments are presented below:

 

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

Revenues and long-lived assets (property and equipment) by geographic area are as follows for the 39-week periods ended September 30, 2006 and September 24, 2005:

 

 

 

      The Company adopted SFAS No. 123(R) using the modified prospective method. Under the modified prospective method, compensation costs are recognized beginning with the effective date based on the requirements of SFAS No. 123(R) for all share-based payments granted after the effective date and based on the requirements of SFAS No. 123 for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain unvested on the effective date. The Company’s consolidated financial statements as of and for 13-week and 39-week periods ended September 30, 2006 reflect the impact of SFAS No. 123(R). In accordance with the modified prospective transition method, the Company’s consolidated financial statements for the prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

      SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as stock-based compensation expenses over the requisite service period in the Company’s consolidated financial statements. Prior to the adoption of SFAS No. 123(R), the Company accounted for stock-based awards to employees and directors using the intrinsic value method in accordance with APB Opinion No. 25 as allowed under SFAS No. 123. Under the intrinsic value method, no stock-based compensation expenses have been recognized in the Company’s consolidated statements of income for stock options because the exercise price of the Company’s stock options granted to employees and directors equaled the fair market value of the underlying stock at the date of grant.

      As stock-based compensation expenses recognized in the accompanying unaudited consolidated statement of income for the 13-week and 39-week periods ended September 30, 2006 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on historical experience and management’s estimates. In the Company’s pro forma information required under SFAS No. 123 for the periods prior to fiscal 2006, the Company accounted for stock option forfeitures as they occurred. The cumulative adjustment to reduce costs that were actually recognized to reflect estimated forfeitures is not material.

      The Company has not yet elected which method it will choose to calculate its historical APIC Pool balance. The Company will elect a method in accordance with the prescribed time limitation for doing so and understands that the election will dictate the treatment of awards vested as of the date of adoption of SFAS No. 123(R) for purposes of updating its APIC Pool post-adoption. During the thirteen weeks ended September 30, 2006, excess tax benefits of $465 thousand were recognized as an increase to the APIC Pool balance and represent qualifying excess tax benefits that increased the APIC Pool eligible to absorb future write-offs of unrealized deferred tax assets. In accordance with SFAS No. 123(R), the $465 thousand is included in the $7.5 million year-to-date reported as a financing cash flow in the accompanying unaudited consolidated statement of cash flows.

      Stock-based compensation expenses recognized in the accompanying unaudited consolidated statement of income for the 13-week and 39-week periods ended September 30, 2006, was $3.4 million and $8.4 million. As a result of the adoption of SFAS No. 123(R), the Company’s income before income taxes and net income for the 13-week period ended September 30, 2006 are $3.7 million and $3.1 million lower, respectively, than if it had continued to account for share-based compensation under APB Opinion No. 25. The adoption of SFAS No. 123(R) decreased the Company’s calculation of basic and diluted earnings per share by $0.01 during the three months ended September 30, 2006. Had the Company determined compensation costs based on the estimated fair value at the grant dates for its stock options granted prior to adoption of SFAS No. 123(R), the Company’s pro forma net income and earnings per common share for the 13-week and 39-week periods ended September 24, 2005 would have been as follows:

 

 

The Company will continue to use the Black-Scholes option pricing model for purposes of valuation for share-based awards. The Company’s determination of fair value of share-based payment awards on the date of grant using the Black-Scholes option pricing model is affected by the Company’s stock price as well as assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to, the Company’s expected price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because the Company’s employee stock options have certain characteristics that are significantly different from traded options, and because changes in the subjective assumptions can materially affect the estimated value, in management’s opinion, the existing valuation models may not provide an accurate measure of the fair value of the Company’s employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123(R) using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

 

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 100,000 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 11,000, 13,242, and 7,296 shares, respectively, were granted under this plan. During the 39-weeks ended September 30, 2006, there were 7,630 options granted under this 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 7,000,000 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. Option activity under the Plan during the 39-weeks ended September 30, 2006, and full year 2005 is summarized below. There have been no “other” stock compensation awards granted under the Plan.

 

 

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 10,000,000 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 39-weeks ended September 30, 2006 is summarized below.

 

A summary of the Company’s stock award activity and related information under the Plan, the 2005 Plan and the Directors’ Plan for the 39-week period ended September 30, 2006 and year ended December 31, 2005 is provided below:

 

 

 

The stated stock price for SAR’s issued is reflected in the above table as the exercise price.

 

There were 19,000 awards granted during the 13-week period ended September 30, 2006 and there were 10,000 options granted during the 13-week period ended September 24, 2005. The fair value of these awards ($18.21) was estimated with the following assumptions: weighted average risk free interest rate 4.65%, dividend yield 1.1%, expected volatility 35%, and expected life 6.32 years. The total grants awarded in the 39-week periods ending September 30, 2006 and September 24, 2005 came to 1,186,250 and 772,450, respectively.

 

The weighted-average remaining contract life for options outstanding at September 30, 2006 is 7.72 years. Options outstanding at September 30, 2006 have exercise prices ranging from $7.00 to $53.12. At September 30, 2006, options to purchase 2,096,452 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 $159.5 million over the next 3 years.

 

The Garmin Board of Directors has approved a post-stock split annual cash dividend of $0.50 per share payable to shareholders of record on December 1, 2006. This dividend will be paid on December 15, 2006.

 

 

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

 

 

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.

 

Total unit sales increased 73% to 1,227,000 in the third quarter of 2006 from 708,000 in the same period of 2005. The higher unit sales volume in the third quarter of fiscal 2006 was primarily attributable to strong sales of products introduced in the prior twelve months, as well as strength in our existing product lines.

Automotive/mobile revenue grew the fastest, nearly 1.5 times the year-ago quarter, on the strength of nüvi, c-series, and other personal navigation devices (PNDs). Edge, Forerunner and eTrex “x-series” products released in the first half of 2006 continued to generate outdoor/fitness segment revenue growth that was stronger than expected. Response to new products introduced in the marine markets continued positive, with solid revenue growth relative to the year-ago quarter. Delay of certain OEM programs, WAAS (Wide Area Augmentation System) introduction, and certain other products resulted in lower revenues in the aviation segment in the 13-week period ended September 30, 2006 when compared with the same period in 2005.

 

Gross profit margin percentage primarily decreased as a result of automotive/mobile segment revenues becoming a larger percentage of the Company’s revenue mix, although improved product costs and gross margin improvement in the outdoor/fitness and marine segments provided support, bringing gross margin for the quarter in at 49% overall. Lower than anticipated sales in aviation coupled with a less favorable product mix in this segment kept this typically solid segment from lending support to overall gross margins during the quarter.

 

 

 

 

Operating income was down 420 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 increased to 41% and 25% within our outdoor/fitness and automotive/mobile segments, respectively, while operating margins decreased to 34% and 32% within our marine and aviation segments, respectively. Our operating margin percentage decreased in part as a function of the gross profit margin percentage decrease, which resulted from the automotive/mobile segment revenues becoming a significantly larger percentage of the Company’s revenue mix, and the fact that aviation revenues declined slightly while R&D costs for our aviation segment continued to grow.

 

 

The average taxable equivalent interest rate return on invested cash during the third quarter of 2006 was 3.8% compared to 2.9% during the same quarter of 2005. The increase in interest income is attributable to our growing cash balances, increasing interest rates, and more active management of our cash balances.

The $14.9 million currency gain was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar during the third quarter of fiscal 2006, when the exchange rate increased to 33.10 TD/USD at September 30, 2006 from 32.37 TD/USD at July 1, 2006. The $36.4 million currency gain in the same quarter of 2005 was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar during the third quarter of fiscal 2005, when the exchange rate increased to 33.19 TD/USD at September 24, 2005 from 31.36 TD/USD at June 25, 2005.

 

 

While our earnings before taxes increased 15% when compared to the same quarter in 2005, our income tax expense decreased by $1.0 million, to $22.6 million, for the 13-week period ended September 30, 2006, from $23.6 million for the 13-week period ended September 24, 2005, due to our lower tax rate. The effective tax rate was 15.5% in the third quarter of 2006 and 18.7% in the third quarter of 2005. The lower tax rate in the third quarter of 2006 when compared to the same quarter in 2005 was related to tax holidays/credits and the favorable mix of taxable income among Company entities.

As a result of the above, net income increased 20% for the 13-week period ended September 30, 2006 to $123.0 million compared to $102.5 million for the 13-week period ended September 24, 2005.

 

 

Total unit sales increased 72% to 3,429,000 in the 39-weeks ending September 30, 2006 from 1,999,000 in the same period of 2005. The higher unit sales volume in the period was primarily attributable to strong sales of new products, most notably automotive portable navigation products, as well as strength in our existing product lines.

Automotive/mobile revenue grew the fastest, nearly 1.7 times the same period in 2005, on the strength of nüvi, c-series, and other personal navigation devices (PNDs), resulting in the automotive/mobile segment becoming a significantly larger part of our product mix. Response to new fitness products like the Edge and Forerunner, along with the new eTrex “x-series” outdoor recreational products with expandable memory, created solid growth in this segment as well. Continued positive response to our new marine products generated solid off-season revenue growth in this segment. While we remain optimistic about the aviation segment, WAAS, product and OEM program delays negatively impacted aviation revenues in the 39-weeks ending September 30, 2006, slowing the expected growth rate of this segment for 2006.