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 May 2, 2008

Common Shares, $.005 par value: 215,664,004

 

 

 

 

 

 

 

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 29, 2008 are not necessarily indicative of the results that may be expected for the year ending December 27, 2008.

The condensed consolidated balance sheet at December 29, 2007 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 29, 2007.

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 29, 2008 and March 31, 2007 both contain operating results for 13-weeks for both year-to-date periods.

 

The components of inventories consist of the following:

 

The Board of Directors approved a share repurchase program on February 4, 2008, authorizing the Company to purchase up to 5.0 million shares of Garmin Ltd.’s common stock as market and business conditions warrant. The share repurchase authorization expires on December 31, 2009. As of March 29, 2008, the Company had repurchased 1,425,000 shares using cash of $90,050.

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

 

There were 3,107,431 anti-dilutive options for the 13-week period ended March 29, 2008. There were 2,391,766 anti-dilutive options for the 13-week period ended March 31, 2007.

 

Comprehensive income is comprised of the following:

 

 

 

Net sales, operating income, and income before taxes 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.

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 29, 2008 and March 31, 2007:

 

 

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 $22.3 million over the next 5 years.

Our earnings before taxes increased 13% when compared to the same quarter in 2007, and our income tax expense increased by $13.6 million, to $34.7 million, for the 13-week period ended March 29, 2008, from $21.0 million for the 13-week period ended March 31, 2007, due to our strong revenue growth and a higher effective tax rate. The effective tax rate was 19.0% in the first quarter of 2008 and 13.1% in the first quarter of 2007. The higher tax rate in the first quarter of 2008 when compared to the same quarter in 2007 was driven by a change in tax law related to the repatriation of earnings from our Taiwan subsidiary and the unfavorable mix of taxable income among Company entities.

 

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 adopted SFAS No. 157 effective December 30, 2007.

 

SFAS No. 157 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). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:

 

 

 

Assets and liabilities measured at estimated fair value on a recurring basis are summarized below:

 

 

 

For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, SFAS No. 157 requires a reconciliation of the beginning and ending balances, separately for each major category of assets. The reconciliation is as follows:

 

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 outlines the accounting and reporting for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The statement is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a material impact on our financial reporting and disclosure.

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. The statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The Company will determine the impact of adopting SFAS 141R on its consolidated financial statements should applicable transactions occur in the future.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). This statement will require holders of derivative instruments to provide qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for interim and annual periods beginning after November 15, 2008. The company is not currently the holder of any derivative instruments; thus, currently adoption of this statement would not have any effect on the Company’s results of operations, financial condition, or cash flows.

 

In the first quarter of 2008, Garmin Ltd. acquired Fairpoint Navigation A/S (the distributor of Garmin’s consumer products in Denmark). The company has been renamed Garmin Danmark A/S. The acquisition is not considered to be material, therefore supplemental pro forma information is not presented.

On March 3, 2008, Garmin Ltd. announced its intent to acquire Formar Electronics N.V./ S.A., the distributor of Garmin’s consumer products in Belgium and Luxembourg, and NavCor Oy the distributor of Garmin’s consumer products in Finland. These acquisitions are not expected to be material.

On May 1, 2008, Garmin Ltd. announced its intent to acquire Puls Elektronik GmbH, the distributor of Garmin’s consumer products in Austria and Satsignal Equipamentos de Comunicação S.A., the distributor of Garmin’s consumer products in Portugal. These acquisitions are not expected to be material.

 

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 (net sales), gross profit, and operating income 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 80% to 2,787,000 in the first quarter of 2008 from 1,551,000 in the same period of 2007. The higher unit sales volume in the first quarter of fiscal 2008 was primarily attributable to strong sales of automotive products during the first quarter, although unit growth also occurred in the outdoor/fitness and aviation segments during the quarter.

Automotive/mobile segment revenue grew the most during the quarter, up 43% from the year-ago quarter, on the strength of nüvi and other personal navigation devices (PNDs). Our aviation segment also performed well, as demand for our retrofit products and G1000 integrated cockpit continued to be strong. Revenues in our outdoor/fitness segment grew relative to the first quarter of 2007 due to positive customer response to the new product offerings, including the Colorado series. The marine segment showed strong growth during the quarter when compared with the first quarter of 2007, driven by continued customer acceptance of new products.

 

Gross profit dollars in the first quarter of 2008 grew 34.6% and gross profit margin remained relatively steady over the first quarter of 2007. First quarter gross profit margins decreased to 53.1% and 63.6% in the outdoor/fitness and aviation segments respectively, when compared to the same quarter in 2007. First quarter 2008 gross profit margins increased to 58.0% and 43.4% in the marine and automotive/mobile segments, respectively, when compared with the first quarter of 2007.

Gross profit margin percentage for the Company overall remained steady primarily as a result of positive results in the automotive/mobile and marine segments. The automotive/mobile segment’s margin improved 20 basis points though it remains the lowest gross margin of our four businesses. The slight gross margin improvement is due to better component pricing which is significant as the segment continued to grow to 61.2% of total gross margin from 57.5% in the year ago quarter. The Company also benefited from increased revenues outside of the U.S. resulting in a 300 basis point increase to gross margins related to foreign currency fluctuations in the quarter. Continued strong sales of new products in the marine retail channel provided off-season support for marine margins, which remained within historic ranges. While the prior year margins in this segment had been negatively impacted by efforts to clear the marine retail channel by discounting older products. Declines in gross margin in the outdoor/fitness and aviation segments are a result of a more mature product mix for the Company during the quarter. Overall, the aviation segment’s strong gross margin profile continued to provide gross margin support for the Company.

 

 

 

 

Operating income was down 210 basis points as a percent of revenue when compared to the first quarter of 2007 due to increased marketing and advertising activities, increased staffing throughout the organization to support our growth and continued research and development expense associated with ongoing development activities. Operating margins decreased to 27.4%, 23.8%, and 32.7% within our outdoor/fitness, automotive/mobile and aviation segments, respectively, when compared with the first quarter in 2007. Operating margins increased to 31.8% within our marine segment. Our operating margin percentage decreased as a function of a slight decline in the gross profit margin percentage enhanced by increased spending as a percentage of net sales in selling, general and administrative expense and research and development expense, as discussed above.

 

 

The average interest rate return on cash and investments during the first quarter of 2008 was 2.9% compared to 4.3% during the same quarter of 2007. The decrease in interest income is attributable to a decline in cash balances and decreasing interest rates.

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling. The U.S. Dollar remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of Garmin France, Garmin Deutschland, Garmin Iberia, Garmin Italia, and Garmin Danmark. As these entities grow, Euro currency moves will generate material gains and losses. Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses. The Canadian dollar is the functional currency of Dynastream Innovations, Inc.; due to this entity’s relative size, its currency moves do not have a material impact on the Company’s financial statements.

The majority of the $4.0 million currency loss in the first quarter of 2008 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar.   During the first quarter of fiscal 2008 the Taiwan Dollar exchange rate increased 6.4% in comparison to the USD, resulting in a $43.7 million loss. Offsetting this impact, the Euro has strengthened 7.6% relative to the U.S. Dollar during the first quarter which resulted in a $39.9 million gain. The relative strength of the Taiwan Dollar and Euro have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs while the Euro transactions relate to revenue. Other net currency gains and the timing of transactions created the remaining loss of $0.2 million.

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 the transactions during the period resulted in Garmin Europe recording a $1.0 million gain.

Other income of $5.4 million in the current quarter was primarily generated from the sale of a portion of our equity interest in Tele Atlas N.V.

 

Our earnings before taxes increased 13% when compared to the same quarter in 2007, and our income tax expense increased by $13.6 million, to $34.7 million, for the 13-week period ended March 29, 2008, from $21.0 million for the 13-week period ended March 31, 2007, due to our strong revenue growth and a higher effective tax rate. The effective tax rate was 19.0% in the first quarter of 2008 and 13.1% in the first quarter of 2007. The higher tax rate in the first quarter of 2008 when compared to the same quarter in 2007 was driven by a change in tax law related to the repatriation of earnings from our Taiwan subsidiary and the unfavorable mix of taxable income among Company entities.

As a result of the above, net income increased 5.7% for the 13-week period ended March 29, 2008 to $147.8 million compared to $139.9 million for the 13-week period ended March 31, 2007.

 

Net cash generated by operating activities was $192.5 million for the 13-week period ended March 29, 2008 compared to $168.7 million for the 13-week period ended March 31, 2007. 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 $170.6 million year-to-date increase in net inventories in this 13-week period of 2008, an increase required to fill strong orders for our products and to address overall growing demand for our products. Accounts receivable decreased $436.9 million, net of bad debts, during the first quarter of 2008 due to lower shipments in the seasonally slower period.

Cash flow used in investing activities during the 13-week period ending March 29, 2008 was $216.4 million. Cash flow used in investing activities principally related to $26.7 million in capital expenditures primarily related to business operation and maintenance activities, the net purchase of $163.4 million of fixed income securities associated with the investment of our on-hand cash balances, and the acquisition of European distributors for $23.7 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 average interest rate return on cash and investments during the first quarter of 2008 was 2.9%

Net cash used in financing activities during the period was $86.9 million resulting from the use of $90.1 million for stock repurchased under our stock repurchase plan, offset by $3.2 million from the 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 2008.

 

 

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 a decrease in raw materials costs offset by an increase in the sale of lower-margin products as a part of the product mix.

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-period 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.

 

 

 

 

 

None

 

Not applicable