Garmin - 10-Q quarterly report FY

 

or

Commission file number 0-31983

(Exact name of Company as specified in its charter)

Company's telephone number, including area code:  (345) 640-9050

 (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 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 ¨ 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 ¨

Number of shares outstanding of the Company's common shares as of July 31, 2009

Common Shares, $.005 par value:  200,512,323

 

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 27, 2008.  Additionally, the Condensed Consolidated Financial Statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q.

The results of operations for the 13-week and 26-week periods ended June 27, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

See accompanying notes.

                                                                                                                                                        

See accompanying notes.                                     

See accompanying notes.

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 26-week periods ended June 27, 2009 are not necessarily indicative of the results that may be expected for the year ending December 26, 2009.

The condensed consolidated balance sheet at December 27, 2008 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 27, 2008.

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 27, 2009 and June 28, 2008 both contain operating results for 13-weeks for both year-to-date periods.

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 7,948,978 anti-dilutive options for the 13-week period ended June 27, 2009.   There were 5,408,834 anti-dilutive options for the 13-week period ended June 28, 2008.

There were 12,622 shares issued as a result of exercises of stock appreciation rights and stock options for the 13-week period ended June 27, 2009.

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 property and equipment, net by geographic area are as follows as of and for the 26-week periods ended June 27, 2009 and June 28, 2008:

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.

Our earnings before taxes decreased 36.8% when compared to the same quarter in 2008, and our income tax expense decreased by $22,101, to $37,970, for the 13-week period ended June 27, 2009, from $60,071 for the 13-week period ended June 28, 2008, due to our earnings before taxes decline.  The effective tax rate was 19.0% for both the 13-weeks and 26-weeks ended June 27, 2009 and the 13-weeks and 26-weeks ended June 28, 2008.   We have experienced a relatively low effective corporate tax rate due to the proportion of our revenue generated by entities in tax jurisdictions with low statutory rates.   In particular,  the profit entitlement afforded our parent company based on its intellectual property rights ownership of our consumer products along with substantial tax incentives offered by the Taiwanese government on certain high-technology capital investments have continued to generate a relatively low tax rate.

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. 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:

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.

For fair value measurements using significant unobservable inputs, an independent third party provided the valuation.  The inputs used in the valuations used the following methodology.  The collateral composition was used to estimate Weighted Average Life based on historical and projected payment information.  Cash flows were projected for the issuing trusts, taking into account underlying loan principal, bonds outstanding, and payout formulas.  Taking this information into account, assumptions were made as to the yields likely to be required, based upon then current market conditions for comparable or similar term Asset Based Securities as well as other fixed income securities.

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:

The following is a summary of the company’s marketable securities classified as available-for-sale securities at June 27, 2009:

The following is a summary of the company’s marketable securities classified as available-for-sale securities at December 27, 2008:

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

The unrealized losses on the Company’s investment in 2008 and year-to-date 2009 were caused primarily by changes in interest rates, specifically, widening credit spreads.  The Company’s investment policy requires investments to be rated A or better with the objective of minimizing the potential risk of principal loss.  Therefore, the Company considers the declines to be temporary in nature.  Fair values were determined for each individual security in the investment portfolio.  When evaluating the investments for other-than-temporary impairment, the Company review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s ability and intent to hold the investment for a period of time, which may be sufficient for anticipated recovery in market value.  During 2008 and year-to-date 2009, the Company did not record any material impairment charges on its outstanding securities.

 

The amortized cost and estimated fair value of marketable securities at June 27, 2009, 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.

For certain of the Company’s financial instruments, including accounts receivable, accounts payable and other accrued liabilities, the carrying amounts approximate fair value due to their short maturities.

In May 2008, the FASB issued EITF 07-1, Accounting for Collaborative Arrangements. EITF Issue 07-1 requires entities entering into collaborative arrangements in which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the commercial success of the joint operating activity to make specific disclosures regarding that arrangement. Garmin announced a strategic alliance with ASUSTeK Computer Inc. on February 4, 2009 that will leverage the companies’ navigation and mobile telephony expertise to design, manufacture and distribute co-branded location-centric mobile phones. The mobile phone product line will be known as the Garmin-Asus nüvifone series. The Company has adopted EITF Issue 07-1 and the strategic alliance did not have a material impact on the Company’s financial condition or operating results in the second quarter of 2009.

In January 2009, the FASB released Proposed Staff Position SFAS 107-b and Accounting Principles Board (APB) Opinion No. 28-a, “Interim Disclosures about Fair Value of Financial Instruments” (SFAS 107-b and APB 28-a).  This proposal amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.  The proposal also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.  This proposal is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company has adopted SFAS 107-b and APB 28-a and the guidance did not have a material impact on the Company’s financial condition or operating results in the second quarter of 2009.

In April 2009, the FASB issued FSP No. FAS 157-4 (“FSP FAS 157-4”), “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability has Significantly Decreased and Identifying Transactions That Are Not Orderly” and FSP No. FAS 115-2 and FAS 124-2 (“FSP FAS 115-2”), “Recognition and Presentation of Other-Than-Temporary Impairments”.  These two FSPs were issued to provide additional guidance about (1) measuring the fair value of financial instruments when the markets become inactive and quoted prices may reflect distressed transactions, and (2) recording impairment charges on investments in debt instruments.  Additionally, the FASB issued FSP No. FAS 107-1 and APB 28-1 (“FSP FAS 107-1”), “Interim Disclosures about Fair Value of Financial Instruments,” to require disclosures of fair value of certain financial instruments in interim financial statements.  The adoption of these FSPs did not materially impact the Company.  These FSPs are effective for financial statements issued for interim and annual reporting periods ending after June 15, 2009.  The Company has adopted FSP FAS 157-4 and the guidance did not have a material impact on the Company’s financial condition or operating results in the second quarter of 2009.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.   SFAS 165 is effective for interim or annual financial periods ending after June 15, 2009.  The Company adopted the provisions of SFAS 165 for the quarter ended June 27, 2009.  The adoption of this provision did not have a material effect on our financial statements.

 

12.  Subsequent Events

On July 30, 2009, the Company’s Board of Directors approved an annual cash dividend of $0.75 per share.  The dividend is payable to shareholders of record on December 1, 2009 and will be paid on December 15, 2009.  The Company estimates the liability to be approximately $150,000 based on the current shares outstanding.

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 27, 2008.  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 27, 2008.

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

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), operating income, and income before taxes 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.

 

 

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

 

Net sales decreased 26.6% for the 13-week period ended June 27, 2009 when compared to the year-ago quarter.  The decline occurred across all segments with the greatest decline in the automotive/mobile segment, as well as aviation.  Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 69.3% in the second quarter of 2008 to 65.3% in the second quarter of 2009.

Total unit sales decreased 5% to 3,715,000 in the second quarter of 2009 from 3,920,000 in the same period of 2008.   The lower unit sales volume in the second quarter of fiscal 2009 was attributable to declining volumes across all segments with the greatest percentage declines occurring in aviation and marine.

Automotive/mobile segment revenue declined 31% from the year-ago quarter, as the average selling price declined 28% and volumes fell 4%.  This segment has slowed due to global macroeconomic conditions which have especially impacted growth in North America and Europe.  The aviation and marine segments declined 28% and 15%, respectively, from the year-ago quarter as both industries experience significant slowdowns associated with the macroeconomic conditions.  Revenues in our outdoor/fitness segment declined 9% from the year ago quarter when we introduced many new products in the segment.

 

Gross profit dollars in the second quarter of 2009 fell 15.7% while gross profit margin increased 680 basis points compared to the second quarter of 2008.  Second quarter gross profit margins increased in all segments, when compared to the same quarter in 2008.   Second quarter 2009 gross profit margin improvements were greatest in the outdoor/fitness and automotive/mobile segments at 1080 basis points and 610 basis points, respectively.

The automotive/mobile segment’s margin increase was driven by a decrease in per unit cost partially offset by average selling price reductions.  The per unit cost benefits were driven by foreign currency fluctuations, material cost reductions, and other cost savings.  The impact to total company gross margin of the automotive/mobile segment declined as it fell to 55.5% of total gross margin from 58.4% in the year-ago quarter.  The Company also benefited from increased margins in the outdoor/fitness, aviation and marine segments due to stable or increased pricing and decreases in per unit costs.  Gross margins were most improved in the outdoor/fitness segment, as pricing was stable and the product mix shifted toward higher margin units.  Aviation and marine gross margins increased 100 basis points and 300 basis points, respectively, from the year-ago quarter.

 

 

Advertising expense decreased both as a percentage of sales and in absolute dollars when compared with the year-ago period.  As a percent of sales, advertising expenses declined to 5.1% in the second quarter of 2009 compared to 6.4% in second quarter of 2008.  The decrease was a result of actions taken by the Company to reduce costs as the macroeconomic conditions impacted sales across our segments and around the world.

 

Selling, general and administrative expense decreased in absolute dollars while increasing as a percentage of sales compared to the year-ago quarter as costs throughout the Company were reduced but not as rapidly as the revenue declines.  Cost reductions related to headcount reductions primarily in operations and reduced bad debt expense in the current year.  The increased expense for the outdoor/fitness segment is driven by the allocation of costs based on revenues.  As outdoor/fitness revenues have increased as a percentage of revenues, additional selling, general and administrative expenses are shifted to the segment.  As a percent of sales, selling, general and administrative expenses increased from 7.3% of sales in the second quarter of 2008 to 9.3% of sales in the second quarter of 2009, as revenues declined.

 

The 5.0% increase in research and development expense was due to ongoing development activities for new products and the addition of almost 200 new engineering personnel to our staff since the year-ago quarter as a result of our continued emphasis on product innovation.   Research and development costs increased $2.7 million when compared with the year-ago quarter representing a 250 basis point increase as a percent of revenue, due to the 27% revenue decline.

 

 

Operating income increased 360 basis points as a percent of revenue when compared to the second quarter of 2008 as declining revenues and continued growth in research and development expense associated with ongoing development activities were offset by gross margin improvement.

 

The average interest rate return on cash and investments during the second quarter of 2009 was 1.5% compared to 3.6% during the same quarter of 2008.  The decrease in interest income is attributable to 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 all other European subsidiaries excluding Garmin Danmark and Garmin Sweden.  As these entities have grown, Euro currency moves generate material gains and losses.   Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses.  The Canadian Dollar and Danish Krone, and Swedish Krona are the functional currency of Dynastream Innovations, Inc., Garmin Danmark, and Garmin Sweden respectively; due to these entities’ relative size, currency moves are not expected to have a material impact on the Company’s financial statements.

The majority of the $4.8 million currency loss in the second quarter of 2009 was due to the weakening of the U.S. Dollar compared to the Euro, the British Pound Sterling, and the Taiwan Dollar.  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.  During the second quarter of 2009, the U.S. Dollar weakened 4.4% and 14.3%, respectively, compared to the Euro and the British Pound Sterling, resulting in a gain of $12.9 million.  Offsetting this gain was a loss of $16.4 million due to the U.S. Dollar weakening 2.6% against the Taiwan Dollar.  The remaining net currency loss of $1.3 million related to other currencies and timing of transactions.

The majority of the $21.6 million currency gain in the second quarter of 2008 was related to the tender of our Tele Atlas N.V. shares.  This transaction generated a realized gain of $20.4 million due to the strengthening of the Euro between the date of purchase of the shares in October 2007 to the date of tender in June 2008.

The gain on sale of equity securities of $45.7 million in the second quarter of 2008 was generated from the sale of a portion of our equity interest in Tele Atlas N.V.

 

Our earnings before taxes decreased 37% when compared to the same quarter in 2008, and our income tax expense decreased similarly by $22.1 million, to $38.0 million, for the 13-week period ended June 27, 2009, from $60.1 million for the 13-week period ended June 28, 2008.  The effective tax rate was 19.0% in the second quarter of 2009 and the second quarter of 2008.

As a result of the above, net income decreased 37% for the 13-week period ended June 27, 2009 to $161.9 million compared to $256.1 million for the 13-week period ended June 28, 2008.

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

Net sales decreased 29.8% for the 26-week period ended June 27, 2009 when compared to the year-ago period.  The decline occurred across all segments with the greatest decline in the automotive/mobile segment, as well as aviation.  Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 68.8% in the first half of 2008 to 62.9% in the first half of 2009.

Total unit sales decreased 9% to 6,132,000 in the first half of 2009 from 6,707,000 in the same period of 2008.   The lower unit sales volume in the first half of fiscal 2009 was attributable to declining volumes across all segments with the greatest percentage declines occurring in aviation and marine.

Automotive/mobile segment revenue declined 35.8% from the year-ago period, as the average selling price declined 30% and volumes declined 9%.   The aviation and marine segments declined 29.5% and 22.8%, respectively, from the year-ago period as both industries experience significant slowdowns associated with the macroeconomic conditions.  Outdoor/fitness segment revenue declined 0.9% as growth in the first quarter was offset by declines in the second quarter as previously discussed.