Garmin - 10-Q quarterly report FY

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 þ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer  þ    Accelerated Filer ¨     Non-accelerated Filer ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ

Number of shares outstanding of the Company's common shares as of October 30, 2009

Common Shares, $.005 par value:  200,669,045

 

 

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 39-week periods ended September 26, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

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 39-week periods ended September 26, 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 September 26, 2009 and September 27, 2008 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 October 22, 2008, authorizing the Company to purchase up to $300,000 of its common shares as market and business conditions warrant.   The share repurchase authorization expires on December 31, 2009.   As of September 26, 2009, the Company had repurchased 117,600 shares using cash of $2,000 with all purchases made in the first quarter.  There remains approximately $256,000 available for repurchase under this authorization given the $42,000 of purchases in fiscal 2008.

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

 

There were 7,097,790 and 6,497,596 anti-dilutive options for the 13-week periods ended on September 26, 2009 and September 27, 2008, respectively.

There were 7,853,062 and 5,655,282 anti-dilutive options for the 39-week periods ended on September 26, 2009 and September 27, 2008, respectively.

 

 

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 39-week periods ended September 26, 2009 and September 27, 2008:

 

The Company’s earnings before taxes increased 21.4% during the third quarter of 2009 when compared to the same quarter in 2008, and income tax expense increased by 3.4%, to $41,546, for the 13-week period ended September 26, 2009, from $40,168 for the 13-week period ended September 27, 2008. The income tax expense increase is due to increased earnings before taxes offset by a decline in the Company’s tax rate.  The effective tax rate was 16.2% and 17.6% for the 13-weeks and 39-weeks ended September 26, 2009 compared to 19.0% for both the 13-weeks and 39-weeks ended September 27, 2008.   The decline in the tax rate for 2009 is related to the release of 2005 income tax reserves for which the statute of limitations has expired.

The Company 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 the parent company based on its intellectual property rights ownership of 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.

 

The Accounting Standards Code (ASC) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The ASC 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, the ASC 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 September 26, 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 September 26, 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 third 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 third 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.  We do not anticipate the adoption of these FSPs will 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 third 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.  We do not anticipate the adoption of SFAS 165 will materially impact the Company.  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.

 

 

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles a replacement of FASB Statement No. 162” (“SFAS 168”).  SFAS 168 provides for the FASB Accounting Standards CodificationTM (the “ASC”) to become the single official source of authoritative, nongovernmental U.S. generally accepted accounting principles (GAAP).  The Codification did not change GAAP but reorganizes the literature.  SFAS 168 is effective for interim and annual periods ending after September 15, 2009.

In October 2009, the FASB issued Accounting Standard Update No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements.  This guidance modifies the fair value requirements of ASC subtopic 605-25 Revenue Recognition-Multiple Element Arrangements by allowing the use of the “best estimate of selling price” in addition to Vendor Specific Objective Evidence (“VSOE”) and VOE (now referred to as third-party evidence “TPE”) for determining the selling price of a deliverable. A vendor is now required to use its best estimate of the selling price when VSOE or TPE of the selling price cannot be determined. In addition, the residual method of allocating arrangement consideration is no longer permitted. The amendments included in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption is permitted.  The Company is investigating the impact of adopting Accounting Standard Update No. 2009-13 on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standard Update No. 2009-14, Software (Topic 985):  Certain Revenue Arrangements That Include Software Elements.    This guidance modifies the scope of ASC subtopic 965-605 Software-Revenue Recognition to exclude from its requirements (a) non-software components of tangible products and (b) software components of tangible products that are sold, licensed, or leased with tangible products when the software components and non-software components of the tangible product function together to deliver the tangible product’s essential functionality.   The amendments included in this update will be effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010.  Early adoption is permitted.  The Company is investigating the impact of adopting Accounting Standard Update No. 2009-14 on its consolidated financial statements.

The Company evaluated subsequent events through the time of filing this Quarterly Report on Form 10-Q on November 4, 2009 and had none to report.

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 10.2% for the 13-week period ended September 26, 2009 when compared to the year-ago quarter.  The decline was driven by the automotive/mobile segment, as well as aviation, offset by increases in the marine and outdoor/fitness segments.  Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 72.0% in the third quarter of 2008 to 69.9% in the third quarter of 2009.

Total unit sales were flat at 3,866,000 in the third quarter of 2009 from 3,855,000 in the same period of 2008.   The slight increase in unit sales volume in the third quarter of fiscal 2009 was attributable to gains in the outdoor/fitness segment offset by a decline in aviation units.

Automotive/mobile segment revenue declined 13% from the year-ago quarter, as the average selling price declined 12% and volumes fell 1%.  This segment has slowed due to global macroeconomic conditions which have especially impacted North America and Europe, as well as increasing penetration rates in the industry.  The aviation segment declined 29% from the year-ago quarter as the industry continued to experience a significant slowdown associated with the macroeconomic conditions.  Revenues in our outdoor/fitness and marine segments increased 11% and 3%, respectively, from the year ago quarter as we delivered new products in the segment.

Gross profit dollars in the third quarter of 2009 grew 6.3% while gross profit margin increased 810 basis points compared to the third quarter of 2008.  Third quarter gross profit margins increased in all segments, excluding outdoor/fitness which fell 10 basis points, when compared to the same quarter in 2008.   Third quarter 2009 gross profit margin improvements were greatest in the automotive/mobile and marine segments at 1060 basis points and 450 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 a mix shift toward newly released products, which typically have lower unit costs due to design efficiencies.  The Company also benefited from increased margins in the aviation and marine segments due to increased pricing and stable or decreasing per unit costs.  Aviation and marine gross margins increased 150 basis points and 450 basis points, respectively, from the year-ago quarter.

 

 

Advertising expense increased as a percentage of sales but decreased in absolute dollars when compared with the year-ago period.  As a percent of sales, advertising expenses increased to 5.9% in the third quarter of 2009 compared to 5.8% in third quarter of 2008.  The decrease of $4.9 million 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 increased in absolute dollars and as a percentage of sales compared to the year-ago quarter.  The increased expense relates to a bad debt accrual due to cash collection risks associated with several of our customers.  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 7.8% of sales in the third quarter of 2008 to 9.1% of sales in the third quarter of 2009.

Operating income increased $22.5 million or 570 basis points as a percent of revenue, when compared to the third quarter of 2008 as declining revenues and continued growth in research and development expense associated with ongoing development activities were more than offset by gross margin improvement and reductions in advertising expense discussed above.

The average interest rate return on cash and investments during the third quarter of 2009 was 1.5% compared to 3.8% during the same quarter of 2008.  The decrease in interest income is attributable to decreasing interest rates, partially offset by higher cash and investment balances.

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 $11.8 million currency gain in the third 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 third quarter of 2009, the U.S. Dollar weakened 4.4% compared to the Euro resulting in a gain of $17.9 million.  Offsetting this gain was a loss of $8.2 million due to the U.S. Dollar weakening 1.3% against the Taiwan Dollar.  The remaining net currency gain of $2.1 million related to other currencies and timing of transactions.

The majority of the $12.8 million currency loss in the third quarter of 2008 was due to the strengthening of the U.S. Dollar.  During the third quarter of fiscal 2008, the Taiwan Dollar weakened 5.0% in comparison to the U.S. Dollar resulting in a $38.5 million gain.  Offsetting this impact, the Euro had weakened 6.5% relative to the U.S. Dollar resulting in a $51.2 million loss.

 

 

Our earnings before taxes increased 21% when compared to the same quarter in 2008, and our income tax expense increased by $1.3 million, to $41.5 million, for the 13-week period ended September 26, 2009, from $40.2 million for the 13-week period ended September 27, 2008.  The effective tax rate was 16.2% and 19.0% in the third quarter of 2009 and the third quarter of 2008, respectively.   The decline in the tax rate for 2009 is related to the release of 2005 income tax reserves for which the statute of limitations has expired.

As a result of the above, net income increased 26% for the 13-week period ended September 26, 2009 to $215.1 million compared to $171.2 million for the 13-week period ended September 27, 2008.

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

Net sales decreased 22.8% for the 39-week period ended September 26, 2009 when compared to the year-ago period.  The decrease occurred across all segments, except outdoor/fitness, with the greatest decrease in the automotive/mobile segment.  Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 69.9% in the year-to-date period for 2008 to 65.8% in 2009.

Total unit sales decreased 5% to 9,997,000 for the year-to-date for 2009 from 10,563,000 in the same period of 2008.   The lower unit sales volume was attributable to declining volumes across all segments, excluding outdoor/fitness, with the greatest percentage declines occurring in aviation and marine.

Automotive/mobile segment revenue declined 27.4% from the year-ago period, as the average selling price declined 23% and volumes declined 6%. The aviation and marine segments declined 29.2% and 16.1%, respectively, from the year-ago period as both industries experience significant slowdowns associated with the macroeconomic conditions.  Outdoor/fitness segment revenue increased 3.9% due to new product introductions in the third quarter.

 

Gross profit dollars for the 39-weeks ended September 26, 2009 fell 14.7% while gross profit margin percentage increased 480 basis points over the same period of the previous year.  Gross profit margins increased in all segments when compared to the same period in 2008.

The automotive/mobile segment gross profit margin percentage increase of 420 basis points was driven by material cost reductions and foreign currency fluctuations as the Company benefited from sales transacted in foreign currencies partially offset by price declines.   Gross profit margin percentage for outdoor/fitness, marine and aviation increased compared to the same period of 2008 due to increased average selling price and decreases in per unit costs driven by product mix, material cost reductions.

 

 

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 5.5% in the year-to-date period of 2009 compared to 6.0% in same period 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.