United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the year ended December 28, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ------ to ------
Commission file number 0-31983
----------------
GARMIN LTD.
(Exact name of Company as specified in its charter)
Cayman Islands 98-0229227
(State or other jurisdiction (I.R.S. Employer identification no.)
of incorporation or organization)
5th Floor, Harbour Place, P.O. Box 30464 SMB, N/A
103 South Church Street (Zip Code)
George Town, Grand Cayman, Cayman Islands
(Address of principal executive offices)
Company's telephone number, including area code: (345) 946-5203
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.01 Per Share Par Value
(Title of Class)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Company's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [x] NO [ ]
Aggregate market value of the voting and non-voting common shares held by
non-affiliates of the Company as of June 28, 2002, the last business day of the
Company's most recently completed second fiscal quarter, based on the closing
price of the Company's common shares on the Nasdaq Stock Market for that date
Common Shares, $.01 par value - $1,424,510,108
Number of shares outstanding of the Company's common shares as of March 7, 2003:
Common Shares, $.01 par value - 107,959,367
Documents incorporated by reference:
Portions of the following document are incorporated herein by reference into
Part III of the Form 10-K as indicated:
Document Part of Form 10-K into
- -------- which Incorporated
------------------
Company's Definitive Proxy Statement for Part III
the 2003 Annual Meeting of Shareholders which
will be filed no later than 120 days after
December 28, 2002
Garmin Ltd.
2002 Form 10-K Annual Report
Table of Contents
Cautionary Statement With Respect To Forward-Looking Comments..............1
Part I
Item 1. Business..........................................................1
Item 2. Properties.......................................................11
Item 3. Legal Proceedings................................................11
Item 4. Submission of Matters to a Vote of Security Holders..............11
Executive Officers and Significant Employees of the Company......11
Part II
Item 5. Market for the Company's Common Shares and Related Shareholder
Matters..........................................................13
Item 6. Selected Financial Data..........................................13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......36
Item 8. Financial Statements and Supplementary Data......................38
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.........................................61
Part III
Item 10. Directors and Executive Officers of the Company..................62
Item 11. Executive Compensation...........................................62
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Shareholder Matters..................................62
Item 13. Certain Relationships and Related Transactions...................63
Item 14. Controls and Procedures..........................................63
Part IV
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K......................................................64
Signatures.......................................................68
GARMIN, the GARMIN logo, the GARMIN globe design, the GARMIN "swoosh"' design,
STREETPILOT, ETREX, ETREX VISTA, ETREX VENTURE, ETREX CAMO, ETREX SUMMIT, EMAP,
TRACBACK, DCG, GPSMAP, GPS III, GPS V, GPSCOM, TRACPAK, G CHART, PERSONAL
NAVIGATOR, GUIDANCE BY GARMIN, AUTOLOCATE, BLUECHART, NAVTALK, MAPSOURCE,
METROGUIDE, CITY SELECT and SEE-THRU are included among the registered
trademarks of Garmin, and ETREX LEGEND, ETREX MARINER, RINO, IQUE, QUE and GEKO
are trademarks of Garmin Ltd. or its subsidiaries. All other trademarks and
trade names referred to in this Form 10-K are the property of their respective
owners.
CAUTIONARY STATEMENT WITH RESPECT TO FORWARD-LOOKING COMMENTS
The discussions set forth in this Annual Report on Form 10-K contain
statements concerning potential future events. Such forward-looking statements
are based upon assumptions by the Company's management, as of the date of this
Annual Report, including assumptions about risks and uncertainties faced by the
Company. In addition, management may make forward-looking statements orally or
in other writings, including, but not limited to, in press releases, in the
annual report to shareholders and in the Company's other filings with the
Securities and Exchange Commission. 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. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of their
date. If any of management's assumptions prove incorrect or should unanticipated
circumstances arise, the Company's 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 Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations", of this Form 10-K
under the heading "Company-Specific Trends and Risks". Readers are strongly
encouraged to consider those factors when evaluating any forward-looking
statements concerning the Company. The Company will not update any
forward-looking statements in this Annual Report to reflect future events or
developments.
Part I
Item 1. Business
This discussion of the business of Garmin Ltd. ("Garmin" or the "Company")
should be read in conjunction with, and is qualified by reference to,
"Management's Discussion and Analysis of the Company's Financial Condition and
Results of Operations" ("MD&A") under Item 7 herein and the information set
forth in response to Item 101 of Regulation S-K in such Item 7 is incorporated
herein by reference in partial response to this Item 1. In addition, pursuant to
Rule 12b-23 under the Securities Exchange Act of 1934, as amended, the segment
and geographic information included in Item 8, "Financial Statements and
Supplementary Data", Note 11 is incorporated herein by reference in partial
response to this Item 1.
The Company was incorporated in the Cayman Islands on July 24, 2000 as a
holding company for Garmin Corporation, a Taiwan corporation, in order to
facilitate a public offering of Garmin shares in the United States. The Company
owns, directly or indirectly, all of the operating companies in the Garmin
group.
The Company's annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports will be made
available free of charge through the Investor Relations section of the Company's
Internet website (http://www.garmin.com) as soon as reasonably practicable after
such material is electronically filed with, or furnished to, the Securities and
Exchange Commission.
Recent Developments in the Company's Business
Share Repurchase Program
On September 24, 2001, Garmin announced that its Board of Directors
approved a share repurchase program authorizing Garmin to purchase up to five
million common shares of Garmin Ltd. as market and business conditions warrant.
The share repurchase authorization expired on December 31, 2002. As of December
31, 2002, Garmin had purchased a total of 595,200 shares pursuant to this share
repurchase authorization at a total cost of $9.8 million. All such purchased
shares have been cancelled and now form part of the authorized but unissued
capital of Garmin, since Cayman Islands law does not permit a company to hold
its own shares.
Management
Gary L. Burrell retired as Co-CEO of Garmin on August 24, 2002, his 65th
birthday. Mr. Burrell remains Co-Chairman and a director of Garmin. Since August
24, 2002, Dr. Min H. Kao has served as the sole CEO and as Co-Chairman of
Garmin. Dr. Kao previously served as Co-CEO of Garmin.
In consideration of proposed Nasdaq rule changes that would require that
Nasdaq-listed companies have a board composed of a majority of independent
directors, Mr. Ruey-Jeng Kao resigned as a director of Garmin on August 19, 2002
and the Board of Directors voted to reduce the number of directors from six to
five. The Company's Board of Directors is now composed of Gary L. Burrell, Dr.
Min H. Kao and three independent directors, Gene M. Betts, Donald H. Eller and
Thomas A. McDonnell.
Debt Retirement
On May 1, 2002, Garmin's subsidiary, Garmin International, Inc. retired all
$9.3 million of its outstanding 1995 series tax-exempt Industrial Revenue Bonds.
Company Overview
Garmin is a leading, worldwide provider of navigation, communications and
information devices, most of which are enabled by GPS technology. Garmin
designs, develops, manufactures and markets under the GARMIN brand a diverse
family of hand-held, portable and fixed mount GPS-enabled products and other
navigation, communications and information products for the general aviation and
consumer markets. Each of Garmin's GPS products utilizes its proprietary
integrated circuit and receiver designs to collect, calculate and display
location, direction, speed and other information in forms optimized for specific
uses.
Overview of the Global Positioning System
The Global Positioning System, first made available by the U.S. government
for commercial use in 1983, is a worldwide navigation system which enables the
precise determination of geographic location using established satellite
technology. The system consists of a constellation of orbiting satellites. The
satellites and their ground control and monitoring stations are maintained and
operated by the United States Department of Defense, which maintains an ongoing
satellite replenishment program to ensure continuous global system coverage.
Access to the system is provided free of charge by the U.S. government.
Reception of GPS signals from the satellites requires line-of-sight
visibility between the satellites and the receiver. GPS receivers generally do
not work indoors and when a receiver is outside, buildings, hills and dense
foliage can attenuate or block reception. GPS receivers can be very compact, and
it is not necessary to have a large dish antenna to receive GPS signals.
Prior to May 2000, the U.S. Department of Defense intentionally degraded
the accuracy of civilian GPS signals in a process known as Selective
Availability ("SA") for national security purposes. SA variably degraded GPS
position accuracy to a radius of 100 meters. On May 2, 2000, the U.S. Department
of Defense discontinued SA. With SA removed, a GPS receiver can calculate its
position to an accuracy of 10 meters or less, enhancing the utility of GPS for
most applications.
The accuracy and utility of GPS can be enhanced even further through
augmentation techniques which compute any remaining errors in the signal and
broadcast these corrections to a GPS device. The Federal Aviation Administration
("FAA") is developing a Wide Area Augmentation System ("WAAS") comprising ground
reference stations and additional satellites which will improve the accuracy of
GPS positioning available in the United States and portions of Canada and Mexico
to approximately 3 meters. WAAS is intended to support the use of GPS as the
primary means of enroute, terminal and approach navigation for aviation in the
United States. The increased accuracy offered by WAAS is expected also to
enhance the utility of WAAS-enabled GPS receivers for consumer applications. The
FAA has stated that it expects the WAAS system to have initial operating
capability by July 2003.
Products
Garmin has achieved a leading market position and a record of growth in
revenues and profits by offering ergonomically designed, user friendly products
with innovative features and designs covering a broad range of applications and
price points.
Garmin's target markets currently consist of the consumer segment, which
primarily includes marine, recreational and automotive products, and the
aviation segment, which consists of panel mount and portable products for use in
general aviation aircraft.
While the marine, recreational, automotive and aviation product lines will
continue to be the core of Garmin's business in the near-term, GPS capabilities
are becoming increasingly commercially viable in a wide range of consumer
products and services, including wireless consumer and mobile information
devices (such as Family Radio Service and General Mobile Radio Service two-way
radios, cellular phones and personal digital assistants). Garmin's goal is to
take advantage of its brand name and its product development experience to
expand its product line in these potentially high-growth GPS markets.
In October 2002, Garmin began shipping its Rino(TM) 110 and Rino 120
products which are Family Radio Service and General Mobile Radio Service two-way
radios with integrated GPS capabilities.
In January 2003, Garmin announced its iQue(TM) 3600 personal digital
assistant which integrates Palm OS based personal digital assistant
functionality with GPS navigation functionality. The iQue3600 is expected to
begin shipping in mid-2003.
Consumer
Garmin currently offers a wide range of consumer products, including
handheld GPS receivers, two-way radios with integrated GPS receivers, our
StreetPilot(R) portable automotive navigation devices and fixed-mount
GPS/Sounder products. Garmin believes that its consumer products are known for
their value leadership, high performance, innovation and ergonomics. Garmin's
iQue 3600 won the 2003 Consumer Electronics Association Best of Innovations
award in the mobile office category.
Garmin also offers a broad set of accessories for its products. For
instance, Garmin's MapSource(R) CDs, which can be loaded into selected GPS
products through a personal computer, provide detailed mapping information for
the United States and Canada, Australia, South Africa and a number of European
and Asian countries. With this information, Garmin's StreetPilot, GPS V(R),
eTrex Venture(R), eTrex(R) Legend, eTrex Vista(R), and eMap(R) products can
provide the customer with detailed information concerning business listings and
points of interest. A user can choose a business listing (e.g., restaurants,
hotels, and shops) and the unit will display the location of the destination on
a map along with the user's location and the distance from the user's location.
Some of Garmin's products offer automatic route calculation and turn-by-turn
route guidance. Garmin's BlueChart(R) CD's and data cards, which are compatible
with selected GPS chartplotter and handheld products, provide detailed nautical
chart data for boaters.
The table below includes a sampling of some of the products that Garmin
currently offers to consumers.
Handheld and portable consumer products:
Geko
(2 models) Miniature size low-cost GPS receivers with colorful
design and easy operation.
eMap Pocket-size GPS with built-in basic map showing
highways and major streets for personal use and
business travel. MapSource compatibility allows
street level mapping, points of interest and
address location functionality.
eTrex
(6 models) Ultra compact full feature handheld GPS design for
outdoor enthusiasts. All models are waterproof and
have rugged designs. The eTrex Summit and eTrex
Vista have electronic compass and barometric
altimeter functions. eTrex Venture has a worldwide
database of cities. eTrex Legend and eTrex Vista have
internal basemaps of either North and South America
or Europe. eTrex Camo features a camouflaged design
and a hunting and fishing almanac. The eTrex class
of products represented approximately 20 percent of
Garmin's total consolidated revenues in fiscal year
2002 and fiscal year 2001. The eTrex class of
products represented less than 10 percent of total
consolidated revenues during fiscal year 2000.
StreetPilot III Portable automotive navigation system with
basemap and MapSource compatibility allowing street
level mapping, points of interest and address
location functionality. Features include "turn by
turn" automatic route guidance and voice prompting
and a high resolution color display.
GPS 12
(2 models) Rugged handhelds for serious outdoor enthusiasts.
Capabilities and features available in different GPS
12 models include basic navigation and built-in
database of cities.
GPS 72 Rugged handheld for land or marine navigation.
Features include 1 MB internal memory for loading
MapSource points of interest and high contrast 4-
level gray scale display.
GPS 76
(3 models) Handheld GPS with large display and a waterproof case
which floats in water. Preloaded with U.S. tidal
data. GPSMAP 76 has internal basemap and MapSource
compatibility for street level mapping and detailed
marine charts. GPSMAP 76S additionally features a
barometric altimeter and an electronic compass.
GPS V Portable GPS with "turn by turn" automatic route
guidance, MapSource compatibility for street level
mapping and selectable vertical or horizontal
displays.
Marine fixed-mount units:
GPS126, 128 and 152 Low cost fixed-mount GPS units for boating with
either a built-in antenna or an external antenna for
exposed installations. GPS 152 has internal data-
base of U.S. cities and navigation aids and has the
compatibility of uploading points of interest data
from a personal computer with MapSource CD-ROM's.
GPSMAP
(10 models) Marine GPS/plotter combinations for boating and
fishing enthusiasts of different levels. Features
available on different models include a variety of
display sizes (ranging in size from 3.8" to 10"),
high-contrast LCD graphics, monochrome 16-color or
256-color displays and the capability of uploading
mapping and nautical chart data from a personal
computer with MapSource and BlueChart CD-ROM's.
Sounder products:
FishFinders
(7 models) Fishfinders feature DCG(R)and See-Thru(R)technology,
which aid fishermen in defining the ocean/lake bottom
and spotting fish in hidden or obscured areas.
Fishfinder Blue series products have dual frequency
transducers for optimal performance in deep water.
GPSMAP/Sounder
(4 models) "All-in-one" product lines with GPS, chartplotter
and sonar functionality. These units come with
different display sizes (ranging in size from 4.2" to
7.25") and the capability of uploading mapping and
nautical chart data. Certain models feature dual
frequency transducers for optimal sonar performance
in deep water. GPSMAP 188C features a high resolution
color display.
Consumer communications products:
Rino
(2 models) Handheld two-way Family Radio Service(FRS)and General
Mobile Radio Service (GMRS) radios that integrate
two-way voice communications with GPS navigation.
Features include patented "peer-to-peer position
reporting" so you can transmit your location to
another Rino radio. The Rino 120 has an internal
basemap and MapSource compatibility for street-level
mapping.
NavTalk GSM A handheld unit that combines a 900 MHz/1800 MHz
GSM digital cellular telephone and a full-featured
GPS receiver with mapping display, "turn by turn"
automatic route guidance and voice prompting.
Features the ability to transmit location from one
unit to another unit and to location-based service
companies.
VHF 720 & 725 Waterproof, portable handheld marine two-way radios
with either 3-watt or 5-watt power output provide
clear VHF communication capabilities for all types of
boaters.
Portable Digital Assistant products:
iQue 3600
(expected to be
available in mid-2003) Portable Digital Assistant(PDA)with integrated GPS
and mapping. Features include Palm OS 5 platform
with all standard Palm applications, voice recorder,
flip-up integrated GPS antenna, 3.8" diagonal 320x480
pixel color display, automatic route calculation,
turn-by-turn voice route guidance and patent-pending
contact-locator feature that connects the address
book and calendar to the GPS mapping features.
Includes internal basemap, 32MB of internal memory,
SD card expansion slot. Compatible with MapSource
and BlueChart products for street-level mapping and
detailed marine charts.
Aviation
Garmin's panel mounted product line includes GPS-enabled navigation, VHF
communications transmitters/receivers, traditional VHF navigation receivers,
instrument landing receivers, digital transponders (which transmit either an
aircraft's altitude or its flight identification number in response to requests
transmitted by ground-based air traffic control radar systems or air traffic
avoidance devices on other aircraft), marker beacon receivers and audio panels.
Garmin's aviation products have won prestigious awards throughout the
industry for their innovative features and ease of use. Garmin was the first
company to offer a GPS receiver, the GPS 155/165, which met the Federal Aviation
Administration's requirements for certain kinds of instrument approaches and did
so a full year ahead of its competitors. The GPS 155/165 with its instrument
approach capability won Flying Magazine's outstanding achievement award for
1994. The GNS 430/530 offers multiple features and capabilities integrated into
a single product. This high level of integration minimizes the use of precious
space in the cockpit, enhances the quality and safety of flight through the use
of modern designs and components and reduces the cost of equipping an aircraft
with modern electronics. The GNS 430 was also recognized by Flying Magazine as
the Editor's Choice Product of the Year for 1998. In 1994 and again in 2000,
Garmin earned recognition from the Aircraft Electronics Association for
outstanding contribution to the general aviation electronics industry. The
GPSMAP 295 won
Aviation Consumer Magazine's Gear of the Year award for best aviation portable
product in 2000 and again in 2001. The GDL 49, the weather data link interface
for Garmin's 400 series and 500 series products, received Flying Magazine's
Editor's Choice award in 2002. Garmin won first place for avionics product
support in Professional Pilot magazine's survey of its readers published in its
January 2003 issue.
Garmin's panel mounted aviation products are sold in the retrofit market
where older aircraft are fitted with the latest electronics from Garmin's broad
product line. Garmin believes this market continues to have good growth
potential as aircraft owners elect to upgrade their existing aircraft at a cost
that is lower than purchasing a new aircraft.
Garmin has also gained market share as an original equipment manufacturer
supplier to leading airframe manufacturers such as the Cessna Aircraft Company,
Cirrus Design Corporation, Diamond Aircraft Industries, EADS Socata, Eurocopter,
Mooney Aircraft Corporation, New Piper Aircraft Company, Raytheon Aircraft
Company, Pilatus Business Aircraft, and Robinson Helicopter. Garmin anticipates
further growth in its sales to the original equipment manufacturers market as
its product offerings expand to include flight control systems and primary
flight and multi-function display instrumentation that use the latest display
technologies.
The table below includes a sampling of some of the aviation products
currently offered by Garmin:
Handheld and portable aviation products:
GPS III Pilot Aviation style portable GPS receiver, with built-in
maps and Jeppesen database.
GPSMAP 196 Portable GPS receiver with 3.8" diagonal moving map
and Horizontal Situation Indicator(HSI)display with
internal basemap and automatic logbook functions.
Also features automatic turn-by-turn automotive
routing and MapSource compatibility for street level
mapping.
GPSMAP 295 A high-end portable GPS receiver designed
specifically for the serious aviator. Features
include a 16-color display and built-in aviation
database; it can download MapSource CD-ROM
information through a personal computer for street
level map details.
Panel-mount aviation products:
GNC 300XL TSO Instrument Flight Rules ("IFR ") certified product
that combines a GPS receiver with VHF radio and
features moving map graphics.
400 Series
(3 models) The GNS 430 is the world's first "all-in-one" IFR
certified GPS navigation receiver/traditional VHF
navigation receiver/instrument landing systems
receiver and VHF communication transmitter/receiver.
Features available in different 400 series models
include 4-color map graphics, GPS, communication and
navigation capabilities.
500 Series
(2 models) These units combine the features of the 400 series
along with a larger 5" color display.
GI-102A & 106A Course deviation indicators (CDIs). The GI-106A
features an instrument landing system receiver to aid
in landing.
GMA 340 A feature-rich audio panel with six-place stereo
intercom and independent pilot/co-pilot
communications capabilities.
GTX 320A & 327 FAA-certified transponders which transmit altitude
or flight identification to air traffic control radar
systems or other aircraft's air traffic avoidance
devices and feature solid-
state construction for longer life. The GTX 327
offers a digital display with timing functions.
GTX 330 & 330D FAA-certified Mode S transponders with data link
capability, including local air traffic information
at FAA radar sites equipped with Traffic Information
Service (TIS).
Aviation communications and datalink products:
NavTalk Pilot GPS-enabled cellular telephone, with built-in
aviation database, offers AirCell(R) airborne service
so that pilots can make and receive cellular
telephone calls while airborne.
GDL 49 Satellite weather data link receiver for displaying
weather information on the 400 and 500 series
products.
Sales and Marketing
Garmin's consumer products are sold through a worldwide network of
approximately 2,500 independent dealers and distributors in approximately 100
countries who meet our sales and customer service qualifications. Garmin intends
to selectively grow its dealer network geographically and by product lines.
Marketing support is provided geographically from Garmin's offices in Olathe,
Kansas (North, South and Central America), Romsey, U.K. (Europe, Middle East and
Africa) and Shijr, Taiwan (Asia and Australia). Garmin's distribution strategy
is intended to increase Garmin's global penetration and presence while
maintaining high quality standards to ensure end-user satisfaction.
Garmin's U.S. consumer segment marketing is handled through its dealers who
are serviced by a staff of regional sales managers and in-house sales
associates. Some of Garmin's largest consumer products dealers include:
o Bass Pro Shops--a freshwater sports specialist with a sophisticated
catalog sales effort and "super store" locations;
o Best Buy--one of the largest U.S. electronics retailers;
o Boaters World--a leading off-shore marine retailer with multiple
locations;
o Cabela's--a major catalog retailer for the outdoor marine market;
o Circuit City--a leading U.S. electronics retailer;
o Target--a leading mass merchandise chain of retail stores;
o Wal-Mart--one of the world's largest mass retailers; and
o West Marine--one of the largest U.S. marine retailers specializing
in offshore boating equipment.
Garmin's Europe, Middle East and Africa consumer segment marketing is
handled through in-country distributors who resell to dealers. Working closely
with Garmin's in-house sales and marketing staff in Romsey, U.K., these
distributors are responsible for inventory levels and staff training
requirements at each retail location. Garmin's Taiwan-based marketing team
handles its Asia marketing effort.
Aviation marketing is handled through dealers around the world. Garmin's
largest aviation dealers include Sportsmen's Market, Tropic Aero and JA Air
Center. All have the training, equipment and certified staff required for the
at-airport installation of Garmin's most sophisticated IFR avionics equipment.
Visual Flight Rules ("VFR") equipment including handheld GPS receivers, is sold
through dealers, usually at airport locations or through catalogs.
In addition to the traditional distribution channels mentioned, Garmin
enjoys significant market penetration with original equipment manufacturers. In
the consumer market, Garmin's products are standard equipment on boats
manufactured by Allison Boats, Cigarette Racing Team, Inc., Cobalt Boats, Pro
Sports Boats and Ranger Boats. In the aviation market, Garmin's avionics are
standard equipment on aircraft built by Cessna Aircraft Company, Cirrus Design
Corporation, EADS Socata, Eurocopter, Pilatus Business Aircraft, Mooney Aircraft
Corporation, Raytheon Aircraft Company, Robinson Helicopter and The New Piper
Aircraft Company. Other aircraft and boat manufacturers offer Garmin's products
as optional equipment.
Competition
The market for navigation, communications and information products is
highly competitive. Garmin believes the principal competitive factors impacting
the market for its products are features, quality, design, customer service,
brand, price, time-to-market and availability. Garmin believes that it generally
competes favorably in these areas.
Garmin believes that its principal competitors for consumer GPS-enabled
product lines are Thales Navigation, Inc. ("Thales"), Lowrance Electronics Inc.
("Lowrance"), Cobra Electronics Corporation ("Cobra"), Raymarine Ltd.
("Raymarine"), Furuno Electronic Company, the Standard Horizon Division of Yaesu
Co. Ltd. ("Standard"), the Northstar Technologies unit of Brunswick Corporation,
Navman Ltd. ("Navman") and Simrad AS ("Simrad"). For Garmin's fishfinder/depth
sounder product lines, Garmin believes that its principal competitors are
Lowrance, Furuno, Raymarine, Simrad and the Humminbird division of Teleflex,
Inc. ("Humminbird"). Garmin believes that its principal competitors for marine
VHF transceiver product lines are Standard, Shakespeare Corporation, Humminbird,
Raymarine, Uniden Corporation, Simrad and Icom, Inc. For Garmin's general
aviation product lines, Garmin considers its principal competitors to be
Lowrance, for portable GPS units, and UPS Aviation Technologies, a subsidiary of
United Parcel Service, Inc., Honeywell, Inc., Goodrich Corporation, Meggitt PLC,
Rockwell Collins, Inc. and Avidyne Corporation for panel-mount GPS and display
units. For Garmin's Family Radio Service and General Mobile Radio Service
product line, Garmin believes that its principal competitors are Motorola, Inc.
("Motorola"), Cobra and Audiovox Corporation. For Garmin's cellular product
line, Garmin believes that its principal competitors are Nokia Oy, Telefon AB LM
Ericsson, Motorola, Benefon Oy, Siemens AG ("Siemens"), Sony Corporation
("Sony") and Samsung. For Garmin's GPS sensor board product lines, Garmin
believes its principal competitors are Furuno, Koden, Trimble Navigation, Ltd.,
Thales, Motorola, Philips N.V. ("Philips") and SiRF Technology, Inc. For
Garmin's automotive product lines, Garmin considers its principal competitors to
be Thales, Alpine Electronics, Inc., Denso KK, Visteon, the On-Star Division of
General Motors Corporation, Navman, Xanavi Informatics Corporation, Robert Bosch
GmbH, and Siemens. For Garmin's personal digital assistant product line, Garmin
considers its principal competitors to be Palm, Inc., Handspring, Inc., Sony,
Hewlett-Packard Company, Dell Computer Corporation and Toshiba Corporation.
For a discussion of Garmin's competitive advantages, see below under
"Manufacturing and Operations".
Research and Development
Garmin's product innovations are driven by its strong emphasis on research
and development and the close partnership between Garmin's engineering and
manufacturing teams. Garmin's products are created by its engineering and design
staff of approximately 340 people worldwide. Garmin's manufacturing staff
includes manufacturing process engineers who work closely with Garmin's design
engineers to ensure manufacturability and manufacturing cost control for its
products. Garmin's design staff includes industrial designers, as well as
software engineers, electrical engineers and mechanical engineers. Garmin
believes the industrial design of its products has played an important role in
Garmin's success. Once a development project is initiated and approved, a
multi-disciplinary team is created to design the product and transition it into
manufacturing.
Below is a table of Garmin's expenditures on research and development over
the last three fiscal years.
Fiscal Years Ended
-----------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
------------------ ----------------- --------------
(In thousands)
Research and development $32,163 $28,164 $21,764
Manufacturing and Operations
Garmin believes that one of its core competencies is its manufacturing
capability at both its Shijr, Taiwan facility and its Olathe, Kansas facility.
Garmin believes that its vertically integrated approach has provided it the
following competitive advantages:
Reduced time-to-market. Utilizing concurrent engineering techniques,
Garmin's products are introduced to production at an early development stage and
the feedback provided by manufacturing is incorporated into the design before
mass production begins. In this manner, Garmin can significantly reduce the time
required to move a product from its design phase to mass production deliveries,
with improved quality and yields. Reducing time to market has enabled Garmin to
offer several industry firsts, such as the Rino GPS-enabled Family Radio
Service/General Mobile Radio Service two-way radio and the GNS 430, which
integrates traditional aviation navigation and communications systems with GPS
in a single package.
Design and process optimization. Using its manufacturing resources, Garmin
can rapidly prototype design concepts, products and processes in order to
achieve higher efficiency, lower cost and best value for the customer. Garmin's
ability to fully explore product design and manufacturing process concepts has
enabled it to optimize its designs to minimize size and weight in a GPS device
that is fully functional, waterproof, and rugged.
Logistical agility. Operating its own manufacturing facilities helps Garmin
minimize problems common to the electronics industry, such as component
shortages and long component lead times. Many products can be re-engineered to
bypass component shortages or reduce cost and the new designs can quickly fill
the distribution pipeline. Garmin can react rapidly to changes in market demand
by maintaining a safety stock of long-lead components or by rescheduling
components from one product line to another.
Garmin's design and manufacturing processes are certified to ISO 9001/2,
international quality standards developed by the International Organization for
Standardization. Garmin's Taiwan manufacturing facility has also achieved QS
9000 quality certification. QS 9000 is a quality standard for automotive
suppliers. In addition Garmin's aviation panel-mount products are designed and
manufactured according to processes which are approved and monitored by the FAA.
Intellectual Property
Garmin's success and ability to compete is dependent in part on its
proprietary technology. Garmin relies on a combination of patent, copyright,
trademark and trade secret laws, as well as confidentiality agreements, to
establish and protect our proprietary rights. As of March 7, 2003, Garmin held
97 U.S. patents that expire at various dates no earlier than 2006. As of March
7, 2003, Garmin had 123 U.S. patent applications pending. Garmin's U.S. patents
do not create any patent rights in foreign countries. In addition, Garmin often
relies on licenses of intellectual property for use in its business. For
example, Garmin obtains licenses for digital cartography technology for use in
our products from various sources. Garmin's registered U.S. trademarks include:
GARMIN; the GARMIN logo; the GARMIN globe design; the GARMIN "swoosh" design;
STREETPILOT; ETREX; ETREX VISTA, ETREX VENTURE, ETREX CAMO, ETREX SUMMIT; EMAP;
TRACBACK; DCG; GPSMAP; GPS III; GPSV; PERSONAL NAVIGATOR; GUIDANCE BY GARMIN;
GPSCOM; PHASETRAC 12; TRACPAK; G CHART; AUTOLOCATE; BLUECHART; NAVTALK;
MAPSOURCE; METROGUIDE; CITY SELECT and SEE-THRU. Our mark GARMIN and certain
other trademarks have also been registered in selected foreign countries.
Garmin's trademarks include ETREX LEGEND; ETREX MARINER; RINO; IQUE; QUE and
GEKO. Some of
Garmin's patents and its registered trademarks and trademarks are owned by
Garmin's subsidiary, Garmin Corporation.
Garmin believes that its continued success depends in large part on the
intellectual skills of its employees and their ability to continue to innovate.
Garmin will continue to file and prosecute patent applications when appropriate
to attempt to protect Garmin's rights in its proprietary technologies.
It is possible that Garmin's current patents, or patents which it may later
acquire, may be successfully challenged or invalidated in whole or in part. It
is also possible that Garmin may not obtain issued patents for inventions it
seeks to protect. It is also possible that Garmin may not develop proprietary
products or technologies in the future that are patentable, or that any patent
issued to Garmin may not provide it with any competitive advantages, or that the
patents of others will harm or altogether preclude Garmin's ability to do
business. Legal protections afford only limited protection for Garmin's
technology. Despite Garmin's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of Garmin's products or to
obtain and use information that Garmin regards as proprietary. Litigation may be
necessary in the future to enforce Garmin's intellectual property rights, to
protect its trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of infringement or
invalidity. Any resulting litigation could result in substantial costs and
diversion of Garmin's resources. Garmin's means of protecting its proprietary
rights may not be adequate and Garmin's competitors may independently develop
similar technology.
Regulations
Garmin's aviation products that are intended for installation in type
certificated aircraft are required to be certified by the FAA, its European
counterpart, the Joint Aviation Authorities, and other comparable organizations
before they can be used in an aircraft. The telecommunications industry is
highly regulated, and the regulatory environment in which Garmin operates is
subject to change. In accordance with Federal Communication Commission ("FCC")
rules and regulations, wireless transceiver and cellular handset products are
required to be certified by the FCC and comparable authorities in foreign
countries where they are sold. Garmin's products sold in Europe are required to
comply with relevant directives of the European Commission. A delay in receiving
required certifications for new products or enhancements to Garmin's products or
losing certification for Garmin's existing products could adversely affect its
business.
Because Garmin Corporation, one of the Company's principal subsidiaries, is
located in Taiwan, foreign exchange control laws and regulations of Taiwan with
respect to remittances into and out of Taiwan may have an impact on Garmin's
operations. The Taiwan Foreign Exchange Control Statute, and regulations
thereunder, provide that all foreign exchange transactions must be executed by
banks designated to handle such business by the Ministry of Finance of Taiwan
and by the Central Bank of China, also referred to as the CBC. Current
regulations favor trade-related foreign exchange transactions. Consequently,
foreign currency earned from exports of merchandise and services may now be
retained and used freely by exporters, while all foreign currency needed for the
import of merchandise and services may be purchased freely from the designated
foreign exchange banks. Aside from trade-related foreign exchange transactions,
Taiwan companies and residents may, without foreign exchange approval, remit
outside and into Taiwan foreign currencies of up to $50 million and $5 million
respectively, or their equivalent, each calendar year. Currency conversions
within the limits are processed by the designated banks and do not have to be
reviewed and approved by the CBC. The above limits apply to remittances
involving a conversion between New Taiwan Dollars and U.S. Dollars or other
foreign currencies. The CBC typically approves foreign exchange in excess of the
limits if a party applies with the CBC for review and presents legitimate
business reasons justifying the currency conversion. A requirement is also
imposed on all enterprises to register all medium and long-term foreign debt
with the CBC.
Employees
As of December 31, 2002, Garmin had 1,575 full-time employees worldwide, of
whom 732 were in the United States, 804 were in Taiwan and 39 were in the United
Kingdom. None of Garmin's employees are represented by a labor union or covered
by a collective bargaining agreement. Garmin considers its employee relations to
be good.
Item 2. Properties
Garmin's U.S. subsidiaries, Garmin International, Inc. and Garmin USA,
Inc., occupy a 240,000 square foot facility on 41 acres in Olathe, Kansas, where
all aviation panel-mount products are manufactured and Garmin products are
warehoused, distributed, and supported for North, Central and South America.
Garmin's subsidiary, Garmin Realty, LLC also purchased an additional 46 acres of
land on the Olathe site in February, 2000 for future expansion. In connection
with the bond financings for the facility in Olathe and the expansion of that
facility, the City of Olathe holds the legal title to this property which is
leased to Garmin's subsidiaries by the City. Upon the payment in full of the
outstanding bonds, the City of Olathe is obligated to transfer title to Garmin's
subsidiaries for the aggregate sum of $200.
On December 16, 2002 Garmin announced that its U.S. subsidiary, Garmin
International, Inc., plans to begin construction in 2003 of an expansion to its
Olathe, Kansas facility. This building expansion is expected to be completed in
2004.
In December 2001, Garmin International, Inc. entered into a ground lease
for 148,320 square feet of land at New Century Airport in Gardner, Kansas. This
ground lease expires in 2026. In January 2002, Garmin International, Inc.
completed construction of a 25,034 square foot aircraft hangar, flight test and
certification facility on this land for use in development and certification of
aviation products.
Garmin's subsidiary, Garmin Corporation, owns a 249,326 square foot
facility in Shijr, Taipei County, Taiwan where it manufactures all of Garmin's
consumer and portable aviation products and warehouses, markets and supports
products for the Pacific Rim countries. Garmin Corporation occupies 208,375
square feet at this facility and leases the remaining 40,951 square feet to
third parties.
Garmin's subsidiary, Garmin (Europe) Ltd., leases an aggregate of 28,358
square feet under three leases in Romsey, England for warehousing, marketing and
supporting Garmin products in Europe, Africa and the Middle East. Garmin
(Europe) Ltd. also repairs products at this facility. One of these leases
expires in 2010 and two of these leases expire in 2015. Garmin International,
Inc. also leases an aggregate of 3,233 square feet of office space in Tempe,
Arizona for software development, and Wichita, Kansas for support for Garmin's
aviation original equipment manufacturer operations.
Item 3. Legal Proceedings
From time to time, Garmin may be involved in litigation relating to claims
arising out of our operations. As of March 7, 2003, Garmin was not a party to
any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers and Significant Employees of the Company
Pursuant to General Instruction G(3) of Form 10-K and instruction 3 to
paragraph (b) of Item 401 of Regulation S-K, the following list is included as
an unnumbered Item in Part I of this Annual Report on Form 10-K in lieu of being
included in the Company's Definitive Proxy Statement in connection with its
annual meeting of shareholders scheduled for June 6, 2003.
Gary L. Burrell, age 65, has served as Co-Chairman of Garmin Ltd. since
August 2000. He also served as Co-Chief Executive Officer of Garmin Ltd. from
August 2000 to August 2002. He has been a director of Garmin Corporation since
January 1990. He served as President of Garmin Corporation from January 1990 to
December 1998. Mr. Burrell has also been Chairman of Garmin International, Inc.
since March 2002, a director of Garmin
International, Inc. since August 1990 and he served as President of Garmin
International, Inc. from August 1990 to March 2002. Mr. Burrell has been
Chairman of Garmin USA, Inc. since March 2002 and a director of Garmin USA, Inc.
since December 2001. He served as President of Garmin USA, Inc. from December
2001 to March 2002. Mr. Burrell has been a director and Chairman of Garmin
(Europe) Ltd. since 1992. Mr. Burrell was a director of Garmin Foreign Sales
Corporation from May 1998 to December 2001 and President from July 1998 to
December 2001. Mr. Burrell holds a BS degree in Electrical Engineering from
Wichita State University and a MS degree in Electrical Engineering from
Rensselaer Polytechnic Institute.
Dr. Min H. Kao, age 54, has served as Co-Chairman of Garmin Ltd. since
August 2000. He has served as Chief Executive Officer of Garmin Ltd. since
August 2002 and previously served as Co-Chief Executive Officer from August 2000
to August 2002. He has been President of Garmin Corporation since January 1999.
He has also been Chairman and a director of Garmin Corporation since January
1990. Dr. Kao has been President of Garmin International, Inc. since March 2002
and a director of Garmin International, Inc. since August 1990. He served as
Vice President of Garmin International, Inc. from April 1991 to March 2002. Dr.
Kao has been President of Garmin USA, Inc. since March 2002 and a director of
Garmin USA, Inc. since December 2001. He served as Vice President of Garmin USA,
Inc. from December 2001 to March 2002. He has been a director of Garmin (Europe)
Ltd. since 1992. Dr. Kao was a director of Garmin Foreign Sales Corporation from
May 1998 to December 2001 and Vice President from July 1998 to December 2001.
Dr. Kao holds Ph.D. and MS degrees in Electrical Engineering from the University
of Tennessee and a BS degree in Electrical Engineering from National Taiwan
University.
Kevin S. Rauckman, age 40, has served as Chief Financial Officer and
Treasurer of Garmin Ltd. since August 2000. He has been Director of Finance and
Treasurer of Garmin International, Inc. since January 1999 and a director of
Garmin International, Inc. since April 2001. He has been Treasurer and a
director of Garmin USA, Inc. since December 2001. Mr. Rauckman was a director
and Treasurer of Garmin Foreign Sales Corporation from January 1999 to December
2001. Previously, Mr. Rauckman served as Director of Finance and in other
finance capacities for one of Allied Signal's (now known as Honeywell
International, Inc.) Aerospace units from May 1996 to January 1999 and served as
Finance Manager with Unisys Corporation, a technology hardware and consulting
services company, from June 1993 to April 1996. Mr. Rauckman holds BS and MBA
degrees in Business from the University of Kansas.
Andrew R. Etkind, age 47, has served as General Counsel and Secretary of
Garmin Ltd. since August 2000. He has been General Counsel of Garmin
International, Inc. since February 1998 and Secretary since October 1998. He has
been General Counsel and Secretary of Garmin USA, Inc. since December 2001.
Previously, Mr. Etkind served as Senior Attorney for Alumax Inc., a manufacturer
of aluminum and aluminum products, from March 1996 to January 1998 and was Vice
President, General Counsel and Secretary of Information Management Resources,
Inc., a software systems development and consulting company, from July 1993 to
February 1996. Mr. Etkind holds BA, MA and LLM degrees from Cambridge
University, England and a JD degree from the University of Michigan Law School.
Gary V. Kelley, age 56, has been Director of Marketing of Garmin
International, Inc. since 1992 and has been a director of Garmin (Europe) Ltd.
since 1993. He has also been Director of Marketing of Garmin USA, Inc. since
January 2002. Mr. Kelley holds a BBA degree from Baker University. He also holds
a commercial pilot license with instrument and flight instructor ratings.
All executive officers are elected by and serve at the discretion of the
Company's Board of Directors. None of the executive officers have employment
agreements with the Company. There are no arrangements or understandings between
the executive officers and any other person pursuant to which he or she was or
is to be selected as an officer. None of the executive officers are related to
one another. Dr. Min H. Kao is the brother of Ruey-Jeng Kao, who is a supervisor
of Garmin Corporation. Elected by the shareholders of Garmin Corporation, a
supervisor serves as an ex-officio member of its Board of Directors to protect
the interests of all shareholders.
PART II
Item 5. Market for the Company's Common Stock and Related Stockholder Matters
The Company's common shares have traded on the Nasdaq National Market under
the symbol "GRMN" since its initial public offering on December 8, 2000. As of
March 7, 2003 there were 148 shareholders of record.
No cash dividends have been paid since the initial public offering of the
Company's common shares on December 8, 2000. The Company intends to retain its
earnings for use in its business and therefore does not currently anticipate
paying any cash dividends.
The range of high and low closing sales prices of the Company's common
shares as reported on the Nasdaq Stock Market for each fiscal quarter of fiscal
years 2001 and 2002 was as follows:
------------------------------------------------------------------------
Year Ended Year Ended
------------------------------------------------------------------------
December 28, 2002 December 29, 2001
------------------------------------------------------------------------
High Low High Low
------------------------------------------------------------------------
------------------------------------------------------------------------
First Quarter $22.92 $18.76 $25.13 $17.00
------------------------------------------------------------------------
Second Quarter $24.19 $21.80 $24.68 $18.00
------------------------------------------------------------------------
Third Quarter $21.90 $18.10 $23.36 $14.40
------------------------------------------------------------------------
Fourth Quarter $30.33 $18.00 $21.32 $15.50
------------------------------------------------------------------------
No net proceeds of Garmin's December 8, 2000 initial public offering (the
"IPO") were expended in fiscal year 2002. $13.4 million of net proceeds of the
IPO were expended in fiscal year 2001. Garmin plans to use the remaining $91.0
million net proceeds from the IPO for working capital and other general
corporate purposes, including possible share repurchases, acquisitions or
strategic partnerships. Garmin currently has no specific plan for allocating
those proceeds among working capital and other general corporate purposes.
Garmin currently has no commitments to make any material investments or
acquisitions and will retain broad discretion in the allocation of net proceeds
from the IPO.
Item 6. Selected Financial Data
The following table sets forth selected consolidated financial data of the
Company. The selected consolidated balance sheet data as of December 28, 2002
and December 29, 2001 and the selected consolidated statement of income data for
the years ended December 28, 2002, December 29, 2001, and December 30, 2000 were
derived from the Company's audited consolidated financial statements and the
related notes thereto which are included in Item 8 of this annual report on Form
10-K. The selected consolidated balance sheet data as of December 30, 2000,
December 25, 1999 and December 26, 1998 and the selected consolidated statement
of income data for the years ended December 25, 1999 and December 26, 1998 were
derived from the Company's audited consolidated financial statements, not
included herein.
The information set forth below is not necessarily indicative of the
results of future operations and should be read together with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the consolidated financial statements and notes to those statements included in
Items 7 and 8 in Part II of this Form 10-K.
Years ended (1)
----------------------------------------------------------------------------------
Dec. 28, Dec. 29, Dec. 30, Dec. 25, Dec. 26,
2002 2001 2000 1999 1998
----------------------------------------------------------------------------------
(in thousands, except per share data)
Consolidated Statements of
Income Data:
Net sales $465,144 $369,119 $345,741 $232,586 $169,030
Cost of goods sold 210,088 170,960 162,015 105,654 82,787
----------- ------------ ------------ ----------- ---------
Gross profit 255,056 198,159 183,726 126,932 86,243
Operating expenses:
Selling, general and
administrative 45,453 38,709 32,669 27,063 24,680
Research and
development 32,163 28,164 21,764 17,339 14,876
----------- ------------ ------------ ----------- ---------
Total operating expenses 77,616 66,873 54,433 44,402 39,556
----------- ------------ ------------ ----------- ---------
Operating income 177,440 131,286 129,293 82,530 46,687
Other income, net (2), (3) 5,294 20,749 11,629 1,602 833
----------- ------------ ------------ ----------- ---------
Income before income
taxes 182,734 152,035 140,922 84,132 47,520
Income tax provision 39,937 38,587 35,259 19,965 12,354
----------- ------------ ------------ ----------- ---------
Net income 142,797 $113,448 $105,663 $64,167 $35,166
=========== ============ ============ =========== =========
Net income per share:
Basic $1.32 $1.05 $1.05 $0.64 $0.35
Diluted $1.32 $1.05 $1.05 $0.64 $0.35
Weighted average common
shares outstanding:
Basic 107,774 108,097 100,489 100,000 99,624
Diluted 108,201 108,447 100,506 100,000 99,624
Cash dividends per share (4) $0.00 $0.00 $0.29 $0.13 $0.12
Consolidated Balance Sheet Data
(at end of Period):
Cash and cash equivalents $216,768 $192,842 $251,731 $104,079 $80,360
Marketable securities $245,708 $131,584 $0 $0 $0
Total assets $698,115 $538,984 $463,347 $250,090 $174,532
Total debt (5) $20,000 $32,188 $46,946 $27,720 $9,708
Total stockholders' equity $602,499 $453,969 $365,239 $194,599 $135,940
- ------------------------------------------------------------------------------------------------------------------------
(1) Our fiscal year-end is the last Saturday of the calendar year and does not
always fall on December 31.
(2) Other income, net mainly consists of interest income, interest expense and
foreign currency gain (loss).
(3) Includes $0.0 million, $11.6 million, $7.0 million, ($1.5) million, and
(2.2) million of foreign currency gains (losses) during 2002, 2001, 2000,
1999, and 1998 respectively.
(4) Represents cash dividends per share based on the actual number of shares
outstanding at the time of the dividend, as adjusted for the 1.12379256 for
1 stock split of our common shares, effected through a stock dividend on
November 6, 2000. There were no cash dividends issued during 2002 or 2001.
(5) Total debt consists of notes payable and long-term debt.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of our financial condition and
results of operations focuses on and is intended to clarify the results of our
operations, certain changes in our financial position, liquidity, capital
structure and business developments for the periods covered by the consolidated
financial statements included in this Form 10-K. This discussion should be read
in conjunction with, and is qualified by reference to, the other related
information including, but not limited to, the audited consolidated financial
statements (including the notes thereto and the independent auditor's report
thereon), the description of our business, all as set forth in this Form 10-K,
as well as the risk factors discussed below (the "Company-Specific Trends and
Risks").
As previously noted, the discussion set forth below, as well as other
portions of this Form 10-K, contains statements concerning potential future
events. 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 on which the statements are based 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, the Company-Specific Trends and Risks. Readers
are strongly encouraged to consider those factors when evaluating any such
forward-looking statement. We will not update any forward-looking statements in
this Form 10-K.
Beginning in 1998, the Company elected to change its fiscal year to a 52-53
week period ending on the last Saturday of the calendar year. Fiscal year 2000
contained 53 weeks compared to 52 weeks for fiscal years 2002, 2001, 1999 and
1998. Unless otherwise stated, all years and dates refer to the Company's fiscal
year and fiscal periods. Unless the context otherwise requires, references in
this document to "we," "us," "our" and similar terms refer to Garmin Ltd. and
its subsidiaries.
Overview
We are a leading worldwide provider of navigation, communications and
information devices, most of which are enabled by Global Positioning System, or
GPS, technology. We operate in two business segments, the consumer and aviation
markets. Both of our segments offer products through our network of independent
dealers and distributors. However, the nature of products and types of customers
for the two segments vary significantly. As such, the segments are managed
separately. Our consumer segment includes portable GPS receivers and accessories
for marine, recreation, land and automotive applications sold primarily to
retail outlets. Our aviation products are portable and panel-mount avionics for
Visual Flight Rules and Instrument Flight Rules navigation and are sold
primarily to retail outlets and certain aircraft manufacturers.
Since our first products were delivered in 1991, we have generated positive
income from operations each year and have funded our growth from these profits.
Our sales have increased at a compounded annual growth rate of 23% since 1996
and our net income has increased at a compounded annual growth rate of 36% since
1996. All of this growth has been organic; none has occurred as a result of any
acquisition or merger.
Since our principal locations are in the United States, Taiwan and the
U.K., we experience some foreign currency fluctuations in our operating results.
The functional currency of our European operations is the U.S. dollar (effective
in 2001) and the functional currency of our Asian operations is the New Taiwan
Dollar. Minimal transactions of our European operations are now denominated in
British Pound Sterling. We experienced $0.0 million, $11.6 million, $7.0
million, and $(1.5) million in foreign currency gains (losses) during fiscal
years 2002, 2001, 2000, and 1999, respectively. To date, we have not entered
into hedging transactions with either the British Pound Sterling or the New
Taiwan Dollar, although we may utilize hedging transactions in the future.
Critical Accounting Policies and Estimates
General
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The presentation of these financial
statements requires the Company to make estimates and judgements that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to customer sales
programs and incentives, product returns, bad debts, inventories, investments,
intangible assets, income taxes, warranty obligations, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgements about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Revenue Recognition
The Company records estimated reductions to revenue for customer sales
programs and incentive offerings including rebates, price protection, promotions
and other volume-based incentives. The reductions to revenue are based on
estimates and judgements using historical experience and expectation of future
conditions. Changes in these estimates could negatively affect the Company's
operating results. These incentives are accrued for on a percentage of sales
basis and reviewed periodically. If market conditions were to decline, the
Company may take actions to increase customer incentive offerings possibly
resulting in an incremental reduction of revenue at the time the incentive is
offered.
Bad Debt
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
Company's estimated losses are based on historical experience and expectation of
future conditions. If the financial condition of the Company's customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required.
Warranties
The Company's products sold are generally covered by a warranty for periods
ranging from one to two years. The Company accrues a warranty reserve for
estimated costs to provide warranty services. The Company's estimate of costs to
service its warranty obligations is based on historical experience and
expectation of future conditions. To the extent the Company experiences
increased warranty claim activity or increased costs associated with servicing
those claims, its warranty accrual will increase resulting in decreased gross
profit.
Product Liability
The Company has no product liability claims outstanding as of December 28,
2002 that are not covered by product liability insurance.
Inventory
The Company writes down its inventory for estimated obsolescence or
unmarketable inventory equal to the difference between the cost of inventory and
the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
Investments
Investments are classified as available for sale and recorded at fair
value, and unrealized investment gains and losses are reflected in stockholders'
equity. Investment income is recorded when earned, and capital gains and losses
are recognized when investments are sold. Investments are reviewed periodically
to determine if they have suffered an impairment of value that is considered
other than temporary. If investments are determined to be impaired, a capital
loss is recognized at the date of determination.
Testing for impairment of investments also requires significant management
judgement. The identification of potentially impaired investments, the
determination of their fair value and the assessment of whether any decline in
value is other than temporary are the key judgement elements. The discovery of
new information and the passage of time can significantly change these
judgements. Revisions of impairment judgements are made when new information
becomes known, and any resulting impairment adjustments are made at that time.
The current economic environment and recent volatility of securities markets
increase the difficulty of determining fair value and assessing investment
impairment. The same influences tend to increase the risk of potentially
impaired assets.
Income Taxes
While no valuation allowance has been recorded, it is the Company's policy
to record a valuation allowance to reduce its deferred tax assets to an amount
that it believes is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would not be able to realize all or part of
its net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made.
Likewise, should the Company determine that it would be able to realize its
deferred tax assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax assets would increase income in the period such
determination was made.
Impairments and Restructuring Charges
The Company has experienced no impairments of long-lived assets, securities
held for investment, or goodwill. No restructuring charges have been necessary.
Depreciation and Amortization
The Company depreciates or amortizes its assets using the straight-line
method.
Retirement and Post Retirement Liabilities; Pension Income and Expense
The retirement benefits provided by the Company are classified as defined
contribution plans. As this is the case, there is no retirement liability to
fund. Because the retirement benefits provided by the Company are not defined
benefit plans, there are no funds held in trust and therefore no pension income
or expense disclosures are necessary.
Environmental Liabilities
The Company is not aware of any environmental liabilities at this time.
Repurchase Obligations
The Company has no repurchase obligations at this time.
Stock-based Compensation
The Company distributes a small number of stock options each year as part
of the Company's compensation package for employees. Employees with certain
levels of responsibility within the Company are eligible for stock options
grants, but the granting of options is at the discretion of the Compensation
Committee of the Board of Directors and is not a contractual obligation. Stock
compensation plans are discussed in detail in Note 13 of the Notes to
Consolidated Financial Statements.
Insurance Loss Reserves
Historically the Company has not experienced losses related to general or
product liability claims, therefore no loss reserves have been created.
Accounting Terms and Characteristics
Net Sales
Our net sales are primarily generated through sales to our global dealer
and distributor network and to original equipment manufacturers. We recognize
sales when products are shipped. Our sales are largely of a consumer nature;
therefore backlog levels are not necessarily indicative of our future sales
results. We aim to achieve a quick turnaround on orders we receive, and we
typically ship most orders within 72 hours.
Net sales are subject to some seasonal fluctuation. Typically, sales of our
consumer products are highest in the second quarter, due to increased demand
during the spring and summer marine season, and in the fourth quarter, due to
increased demand during the holiday buying season. Our aviation products do not
experience much seasonal variation, but are more influenced by the timing of the
release of new products when the initial demand is typically the strongest.
Gross Profit
The most significant components of our cost of goods sold are raw material,
labor and depreciation. Raw material costs, which are our most significant cost
item, have come down slightly as a percentage of sales in recent years, as we
have negotiated lower raw material costs with our key suppliers. As a result,
gross profit has improved somewhat as a percentage of sales when compared with
prior years.
In 2000, we experienced upward pricing pressures on our high technology
components, but had offset those with efficiencies in our manufacturing
processes. We did not experience significant pricing pressure in fiscal 2001 and
fiscal 2002. Our existing practice of performing the design and manufacture of
our products in-house has enabled us to utilize alternative lower cost
components from different suppliers and, where necessary, to redesign our
products to permit us to use these lower cost components. We believe that
because of our practice of performing the design, manufacture and marketing of
our products in-house, both our Shijr, Taiwan and Olathe, Kansas manufacturing
plants have experienced relatively low costs of manufacturing, compared to our
competition. In general, products manufactured in Taiwan have been our highest
volume products. Our manufacturing labor costs historically have been lower in
Taiwan than in Olathe.
Sales price variability has had and can be expected to have an effect on
our gross profit. In the past, prices of some of our handheld devices sold into
the consumer market have declined due to market pressures and introduction of
new products sold at lower price points. The average selling prices of our
aviation products have decreased due to product mix and market pressures
partially offset by the introduction of more advanced products
sold at higher prices. In conjunction with the effects of lower labor costs
experienced on Taiwan production, the effect of the sales price variability
inherent within the mix of GPS-enabled products sold could have a significant
impact on our gross profit.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses consist primarily of:
o salaries for sales and marketing personnel;
o salaries and related costs for executives and administrative
personnel;
o advertising, marketing, and other brand building costs;
o accounting and legal costs;
o information systems and infrastructure costs;
o travel and related costs; and
o occupancy and other overhead costs.
Since we plan to increase market penetration in the future, we expect
selling, general and administrative expenses to continue to increase for the
foreseeable future. We intend to increase advertising and marketing expenses in
order to build increased brand awareness in the consumer marketplace, especially
as we enter into new markets, such as wireless and personal digital assistants
(PDA). We also intend to increase our customer call center support as our
consumer segment continues to grow. We do not anticipate that these increased
expenses will significantly impact our financial results in 2003 and subsequent
periods.
Research and Development
The majority of our research and development costs represent salaries for
our engineers, costs for high technology components used in product and
prototype development, and costs of test equipment needed during product
development.
We have continued to grow our research and development capabilities since
our inception. Substantially all of the research and development of our products
is performed in the United States.
We are committed to increasing the level of innovative design and
development of new products as we strive for expanded ability to serve our
existing consumer and aviation markets as well as new markets for GPS-enabled
devices. We continue to grow our research and development budget on absolute
terms. Research and development expenses may also grow at a faster rate when
compared to our projected revenue growth for fiscal year 2003.
Customers
No customer accounted for greater than 10% of our sales in the year ended
December 28, 2002. Our top ten customers accounted for approximately 25% of net
sales. We have experienced average sales days in our customer accounts
receivable between 35 and 45 days since 1998.
Income Taxes
We have experienced a relatively low effective tax rate in Taiwan due to
lower marginal tax rates and substantial tax incentives offered by the Taiwanese
government on certain high-technology capital investments. Therefore, profits
earned in Taiwan have been taxed at a lower rate than those in the United States
and Europe. As a result, our consolidated effective tax rate was approximately
22% during 2002. We have taken advantage of this tax benefit in Taiwan since our
inception and we expect to continue to benefit from lower effective tax rates at
least through 2007. The current Taiwan tax incentives that Garmin has received
approval for will end in 2007. We have applied for additional incentives for
years beyond 2007. However, there can be no assurance that such tax incentives
will be granted after 2007.
Results of Operations
The following table sets forth our results of operations as a percentage of
net sales during the periods shown:
Fiscal Years Ended
---------------------------------
Dec. 28, Dec. 29, Dec. 30,
2002 2001 2000
---------------------------------
Net sales 100.0% 100.0% 100.0%
Cost of goods sold 45.2% 46.3% 46.9%
----- ----- -----
Gross profit 54.8% 53.7% 53.1%
Operating expenses:
Selling, general and administrative 9.8% 10.5% 9.4%
Research and development 6.9% 7.6% 6.3%
---- ---- ----
Total operating expenses 16.7% 18.1% 15.7%
----- ----- -----
Operating income 38.1% 35.6% 37.4%
Other income, net 1.2% 5.6% 3.4%
---- ---- ----
Income before income taxes 39.3% 41.2% 40.8%
Provision for income taxes 8.6% 10.5% 10.2%
---- ----- -----
Net income 30.7% 30.7% 30.6%
===== ===== =====
The following table sets forth our results of operations for each of our
two segments through income before taxes during the periods shown. For each line
item in the table, the total of the consumer and aviation segments' amounts
equals the amount in the consolidated statements of income included in Item 8.
Fiscal Years Ended
--------------------------------------------------------------------------
December 28, 2002 December 29, 2001 December 30, 2000
----------------- ----------------- -----------------
(in thousands) (in thousands) (in thousands)
Consumer Aviation Consumer Aviation Consumer Aviation
-------- -------- -------- -------- -------- --------
Net sales $350,674 $114,470 $263,358 $105,761 $230,183 $115,558
Cost of goods sold 166,130 43,958 130,836 40,124 114,656 47,359
--------------------------------------------------------------------------
Gross profit 184,544 70,512 132,522 65,637 115,527 68,199
Operating expenses:
Selling, general and administrative 35,114 10,339 29,018 9,691 23,756 8,913
Research and development 18,863 13,300 18,197 9,967 14,210 7,554
--------------------------------------------------------------------------
Total operating expenses 53,977 23,639 47,215 19,658 37,966 16,467
--------------------------------------------------------------------------
Operating income 130,567 46,873 85,307 45,979 77,561 51,732
Other income, net 4,292 1,002 17,204 3,545 10,542 1,087
--------------------------------------------------------------------------
Income before income taxes $134,859 $47,875 $102,511 $ 49,524 $88,103 $52,819
========= ======== ========= ========= ======== =======
Comparison of Fiscal Years Ended December 28, 2002 and December 29, 2001
Net Sales
Net sales increased $96.0 million, or 26.0%, to $465.1 million for fiscal
year ended December 28, 2002, from $369.1 million for fiscal year ended December
29, 2001. The increase during fiscal 2002 was primarily due to the introduction
of 22 new products and overall demand for our consumer products. Sales from our
consumer products accounted for 75.4% of net revenues for fiscal 2002 compared
to 71.3% during fiscal 2001. Sales from our aviation products accounted for
24.6% of net revenues for fiscal 2002 compared to 28.7% during fiscal 2001.
Total consumer and aviation units sold increased 17.0% to 1,557,000 in 2002 from
1,331,000 in 2001. In general, management believes that continuous innovation
and the introduction of new products are essential for future revenue growth.
Net sales for the consumer segment increased $87.3 million, or 33.2%, to
$350.7 million for fiscal 2002 from $263.4 million for fiscal 2001. The increase
was primarily due to the introduction of 18 new consumer products and overall
demand for our consumer products as total units sold were up 17.1%. It is
management's belief that the continued demand for the Company's consumer
products is due to the emergence of the GPS market in general, and overall
increased consumer awareness of the capabilities and applications of GPS.
Net sales for the aviation segment increased $8.7 million, or 8.2%, to
$114.5 million for fiscal 2002 from $105.8 million for fiscal 2001. The increase
for fiscal 2002 was primarily due to the introduction of four new products,
increased penetration into the OEM market, and significant reductions of the
restrictions placed on general aviation following the events of September 11,
2001. While Temporary Flight Restrictions (TFR's) continue to impact general
aviation, the flying community is adapting to these changes and returning to the
skies in greater numbers. Should the Federal Aviation Administration (FAA)
impose more restrictions, or elect to shutdown U.S. airspace in the future,
these factors could have a material adverse effect on our business.
Gross Profit
Gross profit increased $56.9 million, or 28.7%, to $255.1 million for
fiscal year 2002 from $198.2 million in fiscal year 2001. The increase is
primarily attributed to the introduction of 22 new products and overall demand
for our consumer products. Gross profit as a percentage of net revenues improved
to 54.8% in 2002 from 53.7% in 2001. The improvement in gross margin was
primarily due to the introduction of new higher margin products, improved
manufacturing efficiencies on many of the new products introduced throughout the
year, and a reduction of material costs.
Gross profit for the consumer segment increased $52.0 million, or 39.3%, to
$184.5 million for fiscal 2002 from $132.5 million in fiscal 2001. The increase
is primarily attributed to the introduction of 18 new consumer products and
overall demand for our consumer products. Gross profit as a percentage of net
revenues for the consumer segment improved significantly to 52.6% for 2002 when
compared to 50.3% for 2001.
Gross profit for the aviation segment increased $4.9 million, or 7.4%, to
$70.5 million for fiscal 2002 from $65.6 million for fiscal 2001. The increase
in gross profit is primarily due to the increase in revenues associated with the
introduction of four new aviation products, increased penetration into the OEM
market, and a return to less restricted airspace for general aviation aircraft.
Gross profit as a percentage of net revenues decreased slightly to 61.6% in 2002
from 62.1% in 2001. This decrease as a percentage of net revenues for the
aviation segment is primarily attributed to product mix as we experienced a
19.4% increase in lower margin panel mount unit sales during 2002 when compared
to 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.7 million, or
17.4%, to $45.5 million (9.8% of net revenues) for fiscal 2002 from $38.7
million (10.5% of net revenues) for fiscal 2001. Selling, general and
administrative expenses increased $6.1 million, or 21.0%, in the consumer
segment and increased $0.6 million, or
6.7% in the aviation segment. The increase in expense was primarily attributable
to increases in employment generally across the organization (net increase of
146 employees), increased advertising costs (up 13.3%) associated primarily with
new product releases, additional staffing in the customer call center, and
increases in insurance premiums. Overall, selling, general and administrative
expenses increased at a lower rate than revenues due to strong demand for newly
introduced and existing consumer products. Management expects its selling,
general and administrative expenses to increase approximately 12-15% during
fiscal 2003 on an absolute dollar basis due to the anticipated introduction of
new products for 2003.
Research and Development Expenses
Research and development expenses increased $4.0 million, or 14.2%, to
$32.2 million (6.9% of net revenues) for fiscal year 2002 from $28.2 million
(7.6% of net revenues) for fiscal year 2001. Research and development expenses
increased $.67 million, or 3.7%, in the consumer segment and increased $3.3
million, or 33.4%, in the aviation segment. The increase in expense was
primarily attributable to the development and introduction of 22 new products,
and the addition of 67 new engineers to our staff during fiscal 2002. Management
believes that one of the key strategic initiatives for future growth and success
of the Company is continuous innovation, development, and introduction of new
products. Management expects that its research and development expenses will
increase approximately 20% to 25% during fiscal 2003 on an absolute dollar basis
due to the anticipated introduction of new products for fiscal 2003. Management
expects to continue to invest in the research and development of new products
and technology in order to maintain the Company's competitive advantage in the
markets in which it competes.
Other Income (Expense)
Other income (expense) principally consists of interest income, interest
expense and foreign currency exchange gains and losses. Other income for fiscal
year 2002 amounted to $5.3 million compared to other income of $20.7 million for
fiscal year 2001, with the majority of this difference caused by foreign
currency gains in 2001. Interest income for fiscal 2002 amounted to $6.5 million
compared to $11.2 million for fiscal 2001, the decrease being attributable to
the fall in interest rates, reducing the returns on the Company's cash and cash
equivalents. Interest expense decreased to $1.3 million for fiscal 2002 from
$2.2 million for fiscal 2001, due primarily to the reduction of debt and a lower
interest rate environment during fiscal 2002.
During fiscal 2002 the Company's position was neutral with regard to
foreign currency exchange gains and losses, as the U.S. Dollar was at
approximately the same level at the beginning of 2002 relative to the New Taiwan
Dollar (35.17 NTD/USD) as it was at the end of fiscal 2002 (34.90 NTD/USD). In
fiscal 2001 there was an $11.6 million gain due to the significantly increased
strength of the U.S. Dollar compared to the New Taiwan Dollar during 2001, when
the exchange rate increased to 35.17 NTD/USD at December 29, 2001 from 33.01
NTD/USD at December 30, 2000.
Income Tax Provision
Income tax expense increased by $1.4 million, to $39.9 million, for fiscal
year 2002 from $38.6 million for fiscal year 2001 due to our higher taxable
income. The effective tax rate was 21.9% for fiscal 2002 versus 25.4% for fiscal
2001. The decrease in tax rate is due primarily to additional tax benefits
received from Taiwan as a result of our continued capital investment in our
manufacturing facilities there. Management believes that the effective tax rate
for fiscal 2003 will be comparable to fiscal 2002.
Net Income
As a result of the above, net income increased 25.9% to $142.8 million for
fiscal year 2002 compared to $113.4 million for fiscal year 2001.
Comparison of Fiscal Years Ended December 29, 2001 and December 30, 2000
Net Sales
Net sales increased $23.4 million, or 6.8%, to $369.1 million for fiscal
year ended December 29, 2001, from $345.7 million for fiscal year ended December
30, 2000. The increase during fiscal 2001 was primarily due to the introduction
of 25 new products and overall demand for our consumer products. Sales from our
consumer products accounted for 71.3% of net revenues for fiscal 2001 compared
to 66.6% during fiscal 2000. Sales from our aviation products accounted for
28.7% of net revenues for fiscal 2001 compared to 33.4% during fiscal 2000.
Total consumer and aviation units increased 8.8% to 1,331,000 in 2001 from
1,223,000 in 2000
Net sales for the consumer segment increased $33.2 million, or 14.4%, to
$263.4 million for fiscal 2001 from $230.2 million for fiscal 2000. The increase
was primarily due to the introduction of 22 new consumer products and overall
demand for our consumer products as total units were up 9.7%.
Net sales for the aviation segment decreased $9.8 million, or 8.5%, to
$105.8 million for fiscal 2001 from $115.6 million for fiscal 2000. The decrease
for fiscal 2001 was primarily due to declining economic conditions and the shut
down of U.S. airspace as a result of the terrorist attacks that occurred on
September 11, 2001. In addition to the shut down of U.S. airspace, the general
aviation industry was further impacted by the additional restrictions
implemented by the Federal Aviation Administration (FAA) on those flights that
fly utilizing Visual Flight Rules (VFR). The FAA restricted VFR flight inside 30
enhanced Class B (a 20-25 mile radius around the 30 largest metropolitan areas
in the country) airspace areas. The Aircraft Owners and Pilots Association
(AOPA) estimated that these restrictions affected approximately 41,800 general
aviation aircraft based at 282 airports inside the 30 enhanced Class B airspace
areas. The AOPA estimates that approximately 90% of all general aviation flights
are conducted VFR, and that only 15% of general aviation pilots are current to
fly utilizing Instrument Flight Rules (IFR). These restrictions impacted our
revenues since many general aviation aircraft were grounded and were unable to
fly to aviation dealers to buy our products. As a result of the factors
indicated above, total aviation units sold during fiscal 2001 declined 9.3% when
compared to fiscal 2000.
Gross Profit
Gross profit increased $14.5 million, or 7.9%, to $198.2 million for fiscal
year 2001 from $183.7 million in fiscal year 2000. The increase is primarily
attributed to the introduction of 25 new products and overall demand for our
consumer products. Gross profit as a percentage of net revenues improved to
53.7% in 2001 from 53.1% in 2000. The improvement in gross margin was primarily
due to the introduction of new higher margin products, improved manufacturing
efficiencies on many of the new products introduced throughout the year, and a
reduction of material costs.
Gross profit for the consumer segment increased $17.0 million, or 14.7%, to
$132.5 million for fiscal 2001 from $115.5 million in fiscal 2000. The increase
is primarily attributed to the introduction of 22 new consumer products and
overall demand for our consumer products. Gross profit as a percentage of net
revenues for the consumer segment remained relatively flat at 50.3% for 2001
when compared to 50.2% for 2000.
Gross profit for the aviation segment decreased $2.6 million, or 3.8%, to
$65.6 million for fiscal 2001 from $68.2 million for fiscal 2000. The decline in
gross profit was primarily due to the decrease in revenues associated with
declining economic conditions and the shut down of U.S. airspace as a result of
the terrorist attacks that occurred on September 11, 2001. Gross profit as a
percentage of net revenues for the aviation segment improved to 62.1% in 2001
from 59.0% in 2000. This improvement as a percentage of net revenues was
primarily attributed to product mix as we experienced a 13.9% increase in higher
margin panel mount unit sales during 2001 when compared to 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.0 million, or
18.5%, to $38.7 million (10.5% of net revenues) for fiscal 2001 from $32.7
million (9.4% of net revenues) for fiscal 2000. Selling, general and
administrative expenses increased $5.3 million, or 22.2%, in the consumer
segment and increased $0.8 million, or 8.7% in the aviation segment. The
increase in expense was primarily attributable to increases in employment
generally across the organization (net increase of 32 employees), increased
advertising costs (up 27.6%) associated with new product releases, increased
costs associated with being a public company, and increases in insurance
premiums. Overall, selling, general and administrative expenses increased at a
higher rate than revenues due to the need to ramp-up for the release of new
products.
Research and Development Expenses
Research and development expenses increased $6.4 million, or 29.4%, to
$28.2 million (7.6% of net revenues) for fiscal year 2001 from $21.8 million
(6.3% of net revenues) for fiscal year 2000. Research and development expenses
increased $4.0 million, or 28.1%, in the consumer segment and increased $2.4
million, or 31.9%, in the aviation segment. The increase in expense was
primarily attributable to the development and introduction of 25 new products,
and the addition of 50 new engineers to our staff during fiscal 2001.
Other Income (Expense)
Other income (expense) principally consists of interest income, interest
expense and foreign currency exchange gains and losses. Other income for fiscal
year 2001 amounted to $20.7 million compared to other income of $11.6 million
for fiscal year 2000. Interest income for fiscal 2001 amounted to $11.2 million
compared to $6.9 million for fiscal 2000, the increase being attributable to the
growth of the Company's cash and cash equivalents from profitable operations
during the period on which interest income was earned. Interest expense
decreased to $2.2 million for fiscal 2001 from $2.3 million for fiscal 2000, due
primarily to the reduction of debt and a lower interest rate environment during
fiscal 2001.
We recognized a foreign currency exchange gain of $11.6 million for fiscal
2001 compared to a gain of $7.0 million for fiscal 2000. The $11.6 million gain
was due to the significantly increased strength of the U.S. Dollar compared to
the New Taiwan Dollar during 2001, when the exchange rate increased to 35.17
NTD/USD at December 29, 2001 from 33.01 NTD/USD at December 30, 2000. The $7.0
million gain during 2000 was due to the significantly increased strength of the
U.S. Dollar compared to the New Taiwan Dollar during 2000, when the exchange
rate increased to 33.01 NTD/USD at December 30, 2000 from 31.30 NTD/USD at
December 25, 1999.
Income Tax Provision
Income tax expense increased by $3.3 million, to $38.6 million, for fiscal
year 2001 from $35.3 million for fiscal year 2000 due to our higher taxable
income. The effective tax rate was 25.4% for fiscal 2001 versus 25.0% for fiscal
2000. The increase is attributable to the source of taxable income between each
of our subsidiaries changing slightly during 2001.
Net Income
As a result of the above, net income increased 7.4% to $113.4 million for
fiscal year 2001 compared to $105.7 million for fiscal year 2000.
Liquidity and Capital Resources
Net cash generated by operations was $175.4 million, $130.0 million, and
$83.5 million for fiscal years 2002, 2001, and 2000, respectively. We operate
with a strong customer driven approach and therefore carry sufficient inventory
to meet customer demand. Because we desire to respond quickly to our customers
and minimize order fulfillment time, our inventory levels are generally high
enough to meet most demand. We also attempt to carry sufficient inventory levels
on key components so that potential supplier shortages have as minimal an impact
as possible on our ability to deliver our finished products. We do not
anticipate that our inventory management techniques will have a negative impact
on our financial results in the future. We were able to reduce inventory levels
during fiscal year 2002 by $3.6 million when compared to fiscal year end 2001,
without impairing our ability to meet customer demand, by effectively managing
the introduction of 22 new products during the year. We expect that inventory
levels may increase during fiscal 2003 due to anticipated increase in sales.
During fiscal 2002, our capital expenditures totaled $12.4 million, which
was $2.5 million less than during 2001. In fiscal 2001 and 2000, our capital
expenditures totaled approximately $14.9 million and $24.8 million,
respectively. The expenditures in fiscal 2002 were primarily related to general
corporate purposes ($9.8 million) and the addition of surface-mount production
equipment in both the Olathe, Kansas and Shijr, Taiwan facilities ($2.6
million). The expenditures in fiscal 2001 were incurred primarily for the
completed expansion of our Olathe, Kansas facility ($3.2 million), the
construction of our new flight test and certification facility ($1.6 million)
located at the New Century Airport near Olathe, Kansas, and for general
corporate purposes. The expenditures in fiscal 2000 were incurred primarily to
increase our manufacturing capacity both in the United States and in Taiwan. We
financed these capital expenditures through net operating cash flow and debt
from outside financial institutions.
We expect our future capital requirements to include construction costs
related to our recently-announced facilities expansion in Olathe, Kansas, and
purchases of production machinery and equipment to expand capacity. A portion
will also be used for conversion of available space in our Olathe, Kansas
building for manufacturing use and expansion of our manufacturing operations
within our facility in Shijr, Taiwan. We may use a portion of the net proceeds
from our December 2000 Initial Public Offering ("IPO") to acquire targeted
strategic businesses, and we continue to look for these opportunities.
In addition to capital expenditures, cash flow used in investing activities
principally relates to the purchase of fixed income securities associated with
the investment of our on-hand cash balances and approximately $13.5 million
related to the purchase of licenses, of which $11.5 million consists of prepaid
royalties under our license agreement with PalmSource, Inc. for the Palm
Operating System. It is management's goal to invest the on-hand cash consistent
with the Company's investment policy, which has been approved by the Board of
Directors. The investment policy's primary purpose is to preserve capital,
maintain an acceptable degree of liquidity, and maximize yield within the
constraint of maximum safety. The Company's average return on its investments
during fiscal year 2002 was approximately 1.6%.
Cash flow used in financing activities during 2002 relates primarily to the
reduction of our debt. The Company retired approximately $12.2 million of its
long-term debt during fiscal 2002, consisting in good part of an outstanding
issue of industrial revenue bonds. The employee stock purchase program and stock
option exercises were sources of cash in 2002. The Company retired approximately
$14.2 million of its long-term debt during fiscal 2001. The Company repurchased
595,200 shares of its common stock under its stock repurchase program that was
approved by the Board of Directors on September 24, 2001 and expired on December
31, 2002. The cash flow source from financing activities during 2000 was due
primarily to the issuance of debt and IPO proceeds less dividend distributions.
We currently use cash flow from operations to fund our capital
expenditures, to repay debt and to support our working capital requirements. We
expect that future cash requirements will principally be for capital
expenditures, repayment of indebtedness, and working capital requirements.
Cash dividends paid to stockholders were $0.0 million, $0.0 million, and
$29.0 million during fiscal years 2002, 2001 and 2000, respectively. Included in
cash dividends for fiscal 2000 was a special one-time dividend of $17.4 million
that was paid in order to provide funds to shareholders to pay withholding taxes
and stock transfer taxes related to the reorganization of Garmin Corporation.
We believe that our existing cash balances and cash flow from operations
will be sufficient to meet our projected capital expenditures, working capital
and other cash requirements at least through the end of fiscal 2003.
Contractual Obligations and Commercial Commitments
On March 23, 2000, Garmin International, Inc. completed a $20.0 million
20-year Taxable Industrial Revenue Bond issuance (the "2000 Bonds") for the
expansion of its Olathe, Kansas facility. At December 28, 2002, outstanding
principal under the 2000 Bonds totaled $20.0 million. Interest on the 2000 Bonds
is payable monthly at a variable interest rate (1.50% at December 28, 2002),
which is adjusted weekly to the current market rate as determined by the
remarketing agent of the 2000 Bonds with principal due upon maturity on April
15, 2020.
The 2000 Bonds are secured by an irrevocable letter of credit totaling
$20.3 million with facility fees of 0.75%. This renewable letter of credit
initially expires on September 20, 2004. The bank has required a sinking fund be
established with principal payments on long-term debt beginning in 2004 of
$4,002 with semiannual payments of $667 thereafter.
On January 1, 1995, Garmin International, Inc. completed a $9.5 million
30-year Tax-Exempt Industrial Revenue Bond issuance for the construction of its
new corporate headquarters located in Olathe, Kansas. Upon completion of the
project in 1996, Garmin International retired bonds totaling $0.2 million.
During May of fiscal 2002, the remainder of the outstanding bonds were retired
by Garmin International, Inc. for a total of $9.4 million.
The reimbursement agreements entered into by Garmin International, Inc. in
connection with the 2000 Bonds contain restrictive covenants, which include,
among other things, financial covenants requiring minimum cash flow leverage,
maximum capitalization, minimum tangible net worth, and other affirmative and
negative covenants. We do not expect these limitations to have a material effect
on our business or results of operations. We are in compliance with all
covenants contained in the reimbursement agreements.
During 1999, Garmin Corporation borrowed $18.0 million to finance the
purchase of land and a new manufacturing facility in Shijr, Taiwan. The
outstanding balance of $2.8 million at December 29, 2001, was paid in full in
January 2002.
We utilize interest rate swap agreements to manage interest rate exposure.
The principal objective of such financial derivative contracts is to moderate
the effect of fluctuations in interest rates. We, as a matter of policy, do not
speculate in financial markets and therefore do not hold these contracts for
trading purposes. We utilize what are considered simple instruments, such as
non-leveraged interest rate swaps, to accomplish our objectives.
The Company has the option at any time to retire a portion or all of its
long-term debt. The Company believes the funds necessary to fulfill these debt
obligations and commitments will be generated in the course of normal business
operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Recent Accounting Pronouncements
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, Accounting for
Costs Associated with Exit or Disposal Activities, which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this statement are effective for exit or disposal activities initiated after
December 31, 2002. The Company does not expect that the adoption of this
statement will have a significant impact on the Company's financial position as
no exit or disposal activities are currently planned.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This statement requires all entities
with stock-based employee compensation arrangements to provide additional
disclosures in their summary of significant accounting policies note. Since the
Company uses the intrinsic value method of Accounting Principles Board ("APB")
Opinion No. 25, Accounting for Stock Issued to Employees, the accounting
policies note will include a tabular presentation of pro forma net income and
earnings per share using the fair value method prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation. Also, SFAS No. 148 permits entities
changing to the fair value method of accounting for employee stock compensation
to choose from one of three transition methods -- the prospective method, the
modified prospective method, or the retroactive restatement method. Finally,
SFAS No. 148 will require the Company to make interim-period pro forma
disclosures if stock-based compensation is accounted for under the intrinsic
value method in any period presented. The expanded annual disclosure
requirements and the transition provisions are effective for the Company's
fiscal year 2002. The new interim period disclosures are required in the
Company's financial statements for interim periods beginning in the first
quarter of fiscal 2003. This statement has not had and is not expected to have a
material impact on the Company's results of operations or financial condition.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal
years beginning after December 15, 2001. This new standard supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," providing one accounting model for the review of
asset impairment. SFAS No. 144 retains much of the recognition and measurement
provisions of SFAS No. 121, but removes goodwill from its scope. It also
requires long-lived assets to be disposed of other than by sale to be considered
as held and used until disposed of, requiring the depreciable life to be
adjusted as an accounting change. Criteria to classify long-lived assets to be
disposed of by sale has changed from SFAS No. 121, but these costs continue to
be reported at the lower of their carrying amount or fair value less cost to
sell, and will cease to be depreciated.
SFAS No. 144 also supersedes the section of the APB Opinion No. 30, which
prescribes reporting for the effects of a disposal of a segment of a business.
SFAS No. 144 retains the basic presentation provisions of the opinion, but
requires losses on a disposal or discontinued operation to be recognized as
incurred. It also broadens the definition of a discontinued operation to include
a component of an entity. The adoption of this statement has not had and is not
expected to have a material impact on our financial condition or results of
operations.
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." The objective of this statement is to provide
accounting guidance for legal obligations associated with the retirement of
long-lived assets by requiring the fair value of a liability for the asset
retirement obligation to be recognized in the period in which it is incurred.
When the liability is initially recognized, the asset retirement costs should
also be capitalized by increasing the carrying amount of the related long-lived
asset. The liability is then accreted to its present value each period and the
capitalized costs are depreciated over the useful life of the associated asset.
This statement is effective for fiscal years beginning after June 15, 2002, and
is not expected to have a material impact on our financial statements.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes
APB Opinion No. 16, "Business Combinations," and SFAS No. 28, "Accounting for
Pre-acquisition Contingencies of Purchased Enterprises." This statement requires
accounting for all business combinations using the purchase method, and changes
the criteria for recognizing intangible assets apart from goodwill. This
statement is effective for all business combinations initiated after June 30,
2001. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets" and
addresses how purchased intangibles should be accounted for upon acquisition.
The statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. All intangibles are subject to periodic impairment testing and are
adjusted down to fair value. This statement is effective for fiscal years
beginning after December 15, 2001, and its adoption has not had and is not
expected to have a material impact on our financial condition or results of
operations.
In June 1998 and June 1999, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date of
FASB Statement No. 133". These statements require companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge
accounting. SFAS No. 133 was effective for our fiscal year ending December 29,
2001. The adoption of SFAS No. 133 has not had a material impact on our
financial condition or results of operations.
Company-Specific Trends and Risks
You should carefully consider the risks described below regarding an
investment in our common shares. The risks described below are not the only ones
facing our company. Additional risks and uncertainties not presently known to us
or that we currently believe to be immaterial may also impair our business
operations. If any of the following risks occur, our business, financial
condition or operating results could be materially adversely affected.
Risks Related to the Company
Our Global Positioning System products depend upon satellites maintained by
the United States Department of Defense. If a significant number of these
satellites become inoperable, unavailable or are not replaced or if the policies
of the United States government for the use of the Global Positioning System
without charge are changed or if there is interference with Global Positioning
System signals, our business will suffer.
The Global Positioning System is a satellite-based navigation and
positioning system consisting of a constellation of orbiting satellites. The
satellites and their ground control and monitoring stations are maintained and
operated by the United States Department of Defense. The Department of Defense
does not currently charge users for access to the satellite signals. These
satellites and their ground support systems are complex electronic systems
subject to electronic and mechanical failures and possible sabotage. The
satellites were originally designed to have lives of 7.5 years and are subject
to damage by the hostile space environment in which they operate. However, of
the current deployment of satellites in place, some have been operating for more
than 11 years.
If a significant number of satellites were to become inoperable,
unavailable or are not replaced, it would impair the current utility of our
Global Positioning System products and the growth of current and additional
market opportunities. In addition, there can be no assurance that the U.S.
government will remain committed to the operation and maintenance of Global
Positioning System satellites over a long period, or that the policies of the
U.S. government that provide for the use of the Global Positioning System
without charge and without accuracy degradation will remain unchanged. Because
of the increasing commercial applications of the Global Positioning System,
other U.S. government agencies may become involved in the administration or the
regulation of the use of Global Positioning System signals.
European governments have expressed interest in building an independent
satellite navigation system known as Galileo. Depending on the as yet
undetermined design and operation of this system, it is possible that it could
cause interference with Global Positioning System signals.
Any of the foregoing factors could affect the willingness of buyers of our
products to select Global Positioning System-based products instead of products
based on competing technologies.
A shut down of U.S. airspace would harm our business.
On September 11, 2001, terrorists hijacked and crashed four passenger
aircraft operated by commercial air carriers, resulting in major loss of life
and property. Following the terrorist attacks, the Federal Aviation
Administration ("FAA") ordered all aircraft operating in the U.S. to be grounded
for several days. In addition to this shut down of U.S. airspace, the general
aviation industry was further impacted by the additional restrictions
implemented by the FAA on those flights that fly utilizing Visual Flight Rules
(VFR). The FAA restricted VFR flight inside 30 enhanced Class B (a 20-25 mile
radius around the 30 largest metropolitan areas in the USA) airspace areas. The
Aircraft Owners and Pilots Association (AOPA) estimated that these restrictions
affected approximately 41,800 general aviation aircraft based at 282 airports
inside the 30 enhanced Class B airspace areas. The AOPA estimates that
approximately 90% of all general aviation flights are conducted VFR, and that
only 15% of general aviation pilots are current to fly utilizing Instrument
Flight Rules (IFR). These restrictions impacted our revenues in
the aviation segment since many general aviation aircraft were grounded and this
caused potential customers to forgo or defer purchasing our aviation products.
The shut down of U.S. airspace following the September 11, 2001 also caused
delays in the shipment of our products manufactured in our Taiwan manufacturing
facility to our distribution facility in Olathe, Kansas, thereby adversely
affecting our ability to supply new and existing products to our dealers and
distributors.
Any future shut down of U.S. airspace or imposition of restrictions on
general aviation could have a material adverse effect on our business and
financial results.
Any reallocation of radio frequency spectrum could cause interference with the
reception of Global Positioning System signals. This interference could harm our
business.
Our Global Positioning System technology is dependent on the use of the
Standard Positioning Service (SPS) provided by the U.S. Government's Global
Positioning System satellites. The Global Positioning System operates in radio
frequency bands that are globally allocated for radio navigation satellite
services. The assignment of spectrum is controlled by an international
organization known as the International Telecommunications Union ("ITU"). The
Federal Communications Commission ("FCC") is responsible for the assignment of
spectrum for non-government use in the United States in accordance with ITU
regulations. Any ITU or FCC reallocation of radio frequency spectrum, including
frequency band segmentation or sharing of spectrum, could cause interference
with the reception of Global Positioning System signals and may materially and
adversely affect the utility and reliability of our products, which would, in
turn, have a material adverse effect on our operating results. In addition,
emissions from mobile satellite service and other equipment operating in
adjacent frequency bands or inband may materially and adversely affect the
utility and reliability of our products, which could result in a material
adverse effect on our operating results.
Ultra-Wideband radio devices could cause interference with the reception of
Global Positioning System signals if the FCC were to change its rules. This
interference could harm our business.
On February 13, 2003, the FCC adopted a Memorandum Opinion and Order (the
"Order") that allows a limited number of Ultra-Wideband ("UWB") devices to
operate on a licensed basis in the frequency band used by the Global Positioning
System. The Order limits these devices to use by qualified emergency officials
at emission limits that protect the Global Positioning System. The FCC has
stated that it plans to review the rules of operation for UWB devices again
within a twelve to eighteen month period following the date of adoption of the
Order. If the FCC were to issue a further rule authorizing operation of UWB
devices in the frequency band used by the Global Positioning System at higher
power levels than those set out in the Order or otherwise change the
definitional or operational characteristics of permitted UWB devices, such
devices might cause interference with the reception of Global Positioning System
signals. Such interference could reduce demand for Global Positioning System
products in the future. Any resulting change in market demand for Global
Positioning System products could have a material adverse effect on our
financial results.
If we are not successful in the continued development, introduction or timely
manufacture of new products, demand for our products could decrease.
We expect that a significant portion of our future revenue will continue to
be derived from sales of newly introduced products. The market for our products
is characterized by rapidly changing technology, evolving industry standards and
changes in customer needs. If we fail to modify or improve our products in
response to changes in technology, industry standards or customer needs, our
products could rapidly become less competitive or obsolete. We must continue to
make significant investments in research and development in order to continue to
develop new products, enhance existing products and achieve market acceptance
for such products. However, there can be no assurance that development stage
products will be successfully completed or, if developed, will achieve
significant customer acceptance.
If we are unable to successfully develop and introduce competitive new
products, and enhance our existing products, our future results of operations
would be adversely affected. Our pursuit of necessary technology may require
substantial time and expense. We may need to license new technologies to respond
to technological change. These licenses may not be available to us on terms that
we can accept. We may not succeed in adapting our products to new technologies
as they emerge. Development and manufacturing schedules for technology products
are difficult to predict, and there can be no assurance that we will achieve
timely initial customer shipments of new products. The timely availability of
these products in volume and their acceptance by customers are important to our
future success. We have previously experienced delays in shipping certain of our
products and any future delays, whether due to manufacturing delays, lack of
market acceptance, delays in regulatory approval, or otherwise, could have a
material adverse effect on our results of operations.
If we do not correctly anticipate demand for our products, we may not be able to
secure sufficient quantities or cost-effective production of our products or we
could have costly excess production or inventories.
Historically, we have experienced steady increases in demand for our
products (although we did experience a decline in demand for our aviation
products in 2001 due to declining economic conditions and the shut down of U.S.
airspace as a result of the terrorist attacks that occurred on September 11,
2001) and we have generally been able to increase production to meet that
demand. However, the demand for our products depends on many factors and will be
difficult to forecast. We expect that it will become more difficult to forecast
demand as we introduce and support multiple products and as competition in the
market for our products intensifies. Significant unanticipated fluctuations in
demand could cause the following problems in our operations:
o If demand increases beyond what we forecast, we would have to rapidly
increase production. We would depend on suppliers to provide
additional volumes of components and those suppliers might not be
able to increase production rapidly enough to meet unexpected demand.
o Rapid increases in production levels to meet unanticipated demand
could result in higher costs for manufacturing and supply of
components and other expenses. These higher costs could lower our
profit margins. Further, if production is increased rapidly,
manufacturing quality could decline, which may also lower our
margins.
o If forecasted demand does not develop, we could have excess
production resulting in higher inventories of finished products and
components, which would use cash and could lead to write-offs of some
or all of the excess inventories. Lower than forecasted demand could
also result in excess manufacturing capacity at our facilities, which
could result in lower margins.
We may become subject to significant product liability costs.
If our aviation products malfunction or contain errors or defects, airplane
collisions or crashes could occur resulting in property damage, personal injury
or death. Malfunctions or errors or defects in our marine navigational products
could cause boats to run aground or cause other wreckage, personal injury or
death. If any of these events occurs, we could be subject to significant
liability for personal injury and property damage. We maintain insurance against
accident-related risks involving our products. However, there can be no
assurance that such insurance would be sufficient to cover the cost of damages
to others or that such insurance will continue to be available at commercially
reasonable rates. If we are unable to maintain sufficient insurance to cover
product liability costs, our business could be harmed.
We depend on our suppliers, some of which are the sole source for specific
components, and our production would be seriously harmed if these suppliers are
not able to meet our demand and alternative sources are not available, or if the
costs of components rise.
We are dependent on third party suppliers for various components used in
our current products. Some of the components that we procure from third party
suppliers include semiconductors and electroluminescent panels, liquid crystal
displays, memory chips and microprocessors. The cost, quality and availability
of components are
essential to the successful production and sale of our products. Some components
come from our sole source suppliers. International Business Machines
Corporation, RF Micro Devices, Inc. NEC Electronics, Inc. and Texas Instruments
Taiwan Ltd. are each the sole source supplier to us of certain
application-specific integrated circuits incorporating our proprietary designs
which they manufacture for us. Intel Corporation is the sole source supplier of
certain microprocessors used in some of our products. Analog Devices, Inc. is
the sole source supplier of a microprocessor used in our NavTalk GSM and iQue
3600 products. Motorola, Inc. is the sole source supplier of a microprocessor
used in our iQue 3600 product. Alternative sources may not be currently
available for these sole source components.
In the past, we have experienced shortages, particularly involving
components that are also used in cellular phones. In addition, if there are
shortages in supply of components, the costs of such components may rise. If
suppliers are unable to meet our demand for components on a timely basis and if
we are unable to obtain an alternative source or if the price of the alternative
source is prohibitive, or if the costs of components rise, our ability to
maintain timely and cost-effective production of our products would be seriously
harmed.
We license mapping data for use in our products from various sources. There
are only a limited number of suppliers of mapping data for each geographical
region. If we are unable to continue licensing such mapping data and are unable
to obtain an alternative source, or if the price of the alternative source is
prohibitive, our ability to supply mapping data for use in our products would be
seriously harmed.
We rely on independent dealers and distributors to sell our products, and
disruption to these channels would harm our business.
Because we sell a majority of our products to independent dealers and
distributors, we are subject to many risks, including risks related to their
inventory levels and support for our products. In particular, our dealers and
distributors maintain significant levels of our products in their inventories.
If dealers and distributors attempt to reduce their levels of inventory or if
they do not maintain sufficient levels to meet customer demand, our sales could
be negatively impacted.
Our dealers and distributors also sell products offered by our competitors.
If our competitors offer our dealers and distributors more favorable terms,
those dealers and distributors may de-emphasize or decline to carry our
products. In the future, we may not be able to retain or attract a sufficient
number of qualified dealers and distributors. If we are unable to maintain
successful relationships with dealers and distributors or to expand our
distribution channels, our business will suffer.
If we fail to manage our growth and expansion effectively, we may not be able to
successfully manage our business.
Our ability to successfully offer our products and implement our business
plan in a rapidly evolving market requires an effective planning and management
process. We continue to increase the scope of our operations domestically and
internationally and have grown our shipments and headcount substantially. This
growth has placed, and our anticipated growth in future operations will continue
to place, a significant strain on our management systems and resources.
Our business may suffer if we are not able to hire and retain sufficient
qualified personnel or if we lose our key personnel.
Our future success depends partly on the continued contribution of our key
executive, engineering, sales, marketing, manufacturing and administrative
personnel. We currently do not have employment agreements with any of our key
executive officers. We do not have key man life insurance on any of our key
executive officers and do not currently intend to obtain such insurance. The
loss of the services of any of our senior level management, or other key
employees, could harm our business. Recruiting and retaining the skilled
personnel we require to maintain our market position may be difficult. For
example, in recent years there has been a nationwide shortage of qualified
electrical engineers and software engineers who are necessary for us to design
and develop new products
and therefore, it has been challenging to recruit such personnel. If we fail to
hire and retain qualified employees, we may not be able to maintain and expand
our business.
Our sales and gross margins for our products may fluctuate or erode.
Our sales and gross margins for our products may fluctuate from period to
period due to a number of factors, including product mix, competition and unit
volumes. In particular, the average selling prices of a specific product tend to
decrease over that product's life. To offset such decreases, we intend to rely
primarily on obtaining yield improvements and corresponding cost reductions in
the manufacture of existing products and on introducing new products that
incorporate advanced features and therefore can be sold at higher average
selling prices. However, there can be no assurance that we will be able to
obtain any such yield improvements or cost reductions or introduce any such new
products in the future. To the extent that such cost reductions and new product
introductions do not occur in a timely manner or our customers' products do not
achieve market acceptance, our business, financial condition and results of
operations could be materially adversely affected. As we introduce new product
lines that serve cellular handset, personal digital assistant, Family Radio
Service and original equipment manufacturer automotive and sensor board
applications, we may experience a decline in our overall gross margins from
sales of these potentially high volume but low margin product lines.
Our quarterly operating results are subject to fluctuations and seasonality.
Our operating results are difficult to predict. Our future quarterly
operating results may fluctuate significantly. If this occurs, the price of our
stock would likely decline. As we expand our operations, our operating expenses,
particularly our sales, marketing and research and development costs, may
increase. If revenues decrease and we are unable to reduce those costs rapidly,
our operating results would be negatively affected.
Historically, our revenues have usually been weaker in the first and third
quarters of each fiscal year and have, from time to time, been lower than the
preceding quarter. Our devices are highly consumer-oriented, and consumer buying
is traditionally lower in these quarters. Sales of certain of our consumer
products tend to be higher in our second fiscal quarter due to increased
consumer spending for such products during the recreational marine and fishing
season. Sales of certain of our consumer products also tend to be higher in our
fourth fiscal quarter due to increased consumer spending patterns on electronic
devices during the holiday season. In addition, we attempt to time our new
product releases to coincide with relatively higher consumer spending in the
second and fourth fiscal quarters, which contributes to these seasonal
variations.
Because our reporting currency is in U.S. Dollars and the functional currency of
one of our primary operating subsidiaries is in New Taiwan Dollars, exchange
rate fluctuations impact the financial statements of this operating subsidiary
and our consolidated financial statements.
Foreign exchange effects on our financial statements can be material
because our reporting currency is in U.S. Dollars while the functional currency
of Garmin Corporation, one of our operating subsidiaries, is in New Taiwan
Dollars. We are exposed to foreign exchange risks related to recurring foreign
currency payments, principally in U.S. Dollars. In addition, fluctuations in
exchange rates between the U.S. Dollar and the New Taiwan Dollar may have an
adverse impact on the financial statements of Garmin Corporation, and, as a
consequence, upon consolidation have an indirect adverse effect on our
consolidated financial statements.
If we are unable to compete effectively with existing or new competitors, our
resulting loss of competitive position could result in price reductions, fewer
customer orders, reduced margins and loss of market share.
The markets for our products are highly competitive and we expect
competition to increase in the future. We plan to enter the cellular handset
market and the portable digital assistant market and will be competing against
Telefon AB LM Ericsson, Motorola, Inc., Nokia Oy, Palm, Inc., Sony Corporation
and Hewlett-Packard Company with certain products. These competitors, as well as
some of our existing competitors or potential competitors, such as Honeywell
International, Inc. and UPS Aviation Technologies, have significantly greater
financial, technical and
marketing resources than we do. These competitors may be able to respond more
rapidly to new or emerging technologies or changes in customer requirements.
They may also be able to devote greater resources to the development, promotion
and sale of their products. Increased competition could result in price
reductions, fewer customer orders, reduced margins and loss of market share. Our
failure to compete successfully against current or future competitors could
seriously harm our business, financial condition and results of operations.
Our intellectual property rights are important to our operations, and we could
suffer loss if they infringe upon other's rights or are infringed upon by
others.
We rely on a combination of patents, copyrights, trademarks and trade
secrets, confidentiality provisions and licensing arrangements to establish and
protect our proprietary rights. To this end, we hold rights to a number of
patents and registered trademarks and regularly file applications to attempt to
protect our rights in new technology and trademarks. However, there is no
guarantee that our patent applications will become issued patents, or that our
trademark applications will become registered trademarks. Moreover, even if
approved, our patents or trademarks may thereafter be successfully challenged by
others or otherwise become invalidated for a variety of reasons. In addition,
the only patents we have obtained are U.S. patents. Thus, any patents or
trademarks we currently have or may later acquire may not provide us a
significant competitive advantage.
Third parties may claim that we are infringing their intellectual property
rights. Such claims could have a serious adverse effect on our business and
financial condition. Litigation concerning patents or other intellectual
property can be costly and time consuming. We may seek licenses from such
parties, but they could refuse to grant us a license or demand commercially
unreasonable terms. We might not have sufficient resources to pay for the
licenses. Such infringement claims could also cause us to incur substantial
liabilities and to suspend or permanently cease the use of critical technologies
or processes or the production or sale of major products.
Failure to obtain required certifications of our products on a timely basis
could harm our business.
We have certain products, especially in our aviation segment, that are
subject to governmental and similar certifications before they can be sold. For
example, Federal Aviation Administration ("FAA") certification is required for
all of our aviation products that are intended for installation in type
certificated aircraft. To the extent that it is required, certification is an
expensive and time consuming process that requires significant focus and
resources. An inability to obtain, or excessive delay in obtaining, such
certifications could have an adverse effect on our ability to introduce new
products and, therefore, our operating results. In addition, we cannot assure
you that our certified products will not be decertified. Any such
decertification could have an adverse effect on our operating results.
Our business is subject to economic, political and other risks associated with
international sales and operations.
Our business is subject to risks associated with doing business
internationally. We estimate that approximately 27% of our net sales in the
fiscal year ended December 28, 2002 represented products shipped to
international destinations. Accordingly, our future results could be harmed by a
variety of international factors, including:
o changes in foreign currency exchange rates;
o changes in a specific country's or region's political or economic
conditions, particularly in emerging markets;
o trade protection measures and import or export licensing
requirements;
o potentially negative consequences from changes in tax laws;
o difficulty in managing widespread sales and manufacturing operations;
and
o less effective protection of intellectual property.
We may experience unique economic and political risks associated with companies
that operate in Taiwan.
Relations between Taiwan and the People's Republic of China, also referred
to as the PRC, and other factors affecting the political or economic conditions
of Taiwan in the future could affect our business and the market price and the
liquidity of our shares. Our principal manufacturing facilities where we
manufacture all of our products, except our panel-mounted aviation products, are
located in Taiwan.
Taiwan has a unique international political status. The PRC asserts
sovereignty over all of China, including Taiwan, certain other islands and all
of mainland China. The PRC government does not recognize the legitimacy of the
Taiwan government. Although significant economic and cultural relations have
been established during recent years between Taiwan and the PRC, the PRC
government has indicated that it may use military force to gain control over
Taiwan in certain circumstances, such as the declaration of independence by
Taiwan. Relations between Taiwan and the PRC have on occasion adversely affected
the market value of Taiwanese companies and could negatively affect our
operations in Taiwan in the future.
There is uncertainty as to our shareholders' ability to enforce certain foreign
civil liabilities in the Cayman Islands and Taiwan.
We are a Cayman Islands company and a substantial portion of our assets are
located outside the United States, particularly in Taiwan. As a result, it may
be difficult for you to effect service of process within the United States upon
us. In addition, there is uncertainty as to whether the courts of the Cayman
Islands and Taiwan would recognize or enforce judgments of United States courts
obtained against us predicated upon the civil liability provisions of the
securities laws of the United States or any state thereof, or be competent to
hear original actions brought in the Cayman Islands or Taiwan against us
predicated upon the securities laws of the United States or any state thereof.
Our shareholders may face difficulties in protecting their interests because we
are incorporated under Cayman Islands law.
Our corporate affairs are governed by our Memorandum and Articles of
Association and by the Companies Law (2002 Revision) and the common law of the
Cayman Islands. The rights of our shareholders and the fiduciary
responsibilities of our directors under Cayman Islands law are not as clearly
established as under statutes or judicial precedent in existence in
jurisdictions in the United States. Therefore, our public shareholders may have
more difficulty in protecting their interests in the face of actions by the
management, directors or our controlling shareholders than would shareholders of
a corporation incorporated in a jurisdiction in the United States, due to the
comparatively less developed nature of Cayman Islands law in this area.
We may pursue strategic acquisitions, investments, strategic partnerships or
other ventures, and our business could be materially harmed if we fail to
successfully identify, complete and integrate such transactions.
We intend to evaluate acquisition opportunities and opportunities to make
investments in complementary businesses, technologies, services or products, or
to enter into any strategic partnerships with parties who can provide access to
those assets, additional product or services offerings or additional industry
expertise. We currently have no commitments to make any material investments or
acquisitions, or to enter into strategic partnerships. We may not identify
suitable acquisition, investment or strategic partnership candidates, or if we
do identify suitable candidates, we may not complete those transactions on
commercially favorable terms, or at all.
Any future acquisition could result in difficulties assimilating acquired
operations and products and diversion of capital and management's attention away
from other business issues and opportunities. Integration of acquired companies
may result in problems related to integration of technology and inexperienced
management
teams. In addition, the key personnel of the acquired company may decide not to
work for us. Our management has not had experience in assimilating acquired
organizations and products into our operations. We may not successfully
integrate any operations, personnel or products that we may acquire in the
future. If we fail to successfully integrate such transactions, our business
could be materially harmed.
We have benefited in the past from Taiwan government tax incentives offered on
certain high technology capital investments that may not always be available.
Our effective tax rate is lower than the U.S. Federal statutory rate,
because we have benefited from lower tax rates since our inception and from
incentives offered in Taiwan related to our high technology investments in
Taiwan. The loss of these tax benefits could have a significant effect on our
financial results in the future.
Changes in our United States federal income tax classification or in applicable
tax law could result in adverse tax consequences to our shareholders.
We do not believe that we (or any of our non-United States subsidiaries)
are currently a "foreign personal holding company" or "passive foreign
investment company" for United States federal income tax purposes. We would
constitute a foreign personal holding company in any taxable year if (1) 60% (or
50% in any year following the year in which we first became a foreign personal
holding company) or more of our gross income were foreign personal holding
company income (which is generally income of a passive nature such as dividends,
interest and royalties) (the "income test") and (2) more than 50% of the voting
power or value of our equity were owned, directly or indirectly, by five or
fewer U.S. holders that are individuals (the "shareholder test"). If we (or any
of our non-United States subsidiaries) are classified as a foreign personal
holding company in any taxable year, then each shareholder that is a United
States person would be required to pay tax on its pro rata share of the
undistributed foreign personal holding income of such foreign personal holding
company. We currently satisfy the shareholder test for qualifying as a foreign
personal holding company but intend to manage our affairs so as to attempt to
avoid satisfaction of the income test for qualifying as a foreign personal
holding company, or minimize the impact to our shareholders if we satisfy the
income test, to the extent this management of our affairs would be consistent
with our business goals, although we cannot assure you in this regard.
We do not expect to become a passive foreign investment company. However,
because the passive foreign investment company determination is made annually on
the basis of facts and circumstances that may be beyond our control and because
the principles for applying the passive foreign investment company tests are not
entirely clear, we cannot assure you that we will not become a passive foreign
investment company. If we are a passive foreign investment company in any year,
then any of our shareholders that is a United States person could be liable to
pay tax at ordinary income tax rates plus an interest charge upon some
distributions by us or when that shareholder sells our common shares at a gain.
Further, if we are classified as a passive foreign investment company in any
year in which a United States person is a shareholder, we generally will
continue to be treated as a passive foreign investment company with respect to
such shareholder in all succeeding years, regardless of whether we continue to
satisfy the income or asset tests described above. Additional tax considerations
would apply if we or any of our subsidiaries were a controlled foreign
corporation or a personal holding company.
Risks Relating to Our Shares
We do not plan to pay dividends in the foreseeable future.
We do not currently anticipate paying cash dividends for the foreseeable
future. In addition, if in the future we determined to pay dividends on our
shares, as a holding company, we may be dependent on receipt of funds from our
operating subsidiaries. Our principal operating subsidiary is a Taiwan company
and dividends payable to us from that company would be subject to Taiwan
withholding tax.
The markets for high technology stocks have experienced extreme volatility and
our share price may be subject to significant fluctuations and volatility.
The markets for high technology stocks have experienced extreme volatility
that has often been unrelated to the operating performance of the particular
companies. These broad market fluctuations may adversely affect the trading
price of our common shares.
Our officers and directors exert substantial influence over us.
Members of our Board of Directors and our executive officers, together with
members of their families and entities that may be deemed affiliates of or
related to such persons or entities, beneficially own approximately 44% of our
outstanding common shares. Accordingly, these shareholders may be able to
determine the outcome of corporate actions requiring shareholder approval, such
as mergers and acquisitions. This level of ownership may have a significant
effect in delaying, deferring or preventing a change in control of Garmin and
may adversely affect the voting and other rights of other holders of our common
shares.
Prior to 2006, without the approval of a majority of certain of our
shareholders, we may not dispose of our shares of Garmin Corporation or its
assets, even if it would benefit all of our shareholders.
In connection with the reorganization whereby Garmin became the holding
company for Garmin Corporation, shareholders of Garmin Corporation entered into
a shareholders' agreement whereby each shareholder party to the agreement agreed
to take all reasonable actions required to prevent the disposition by Garmin of
any shares of Garmin Corporation or of substantially all of the assets of Garmin
Corporation until after December 31, 2005 except upon approval of a majority in
interest of such shareholders who are U.S. citizens or residents. Certain of our
officers and directors own a substantial portion of these shares.
Provisions in our charter documents might deter, delay or prevent a third party
from acquiring us, which could decrease the value of our shares.
Our Board of Directors has the authority to issue up to 1,000,000 preferred
shares and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the shareholders. This could have an adverse impact on the market
price of our common shares. We have no present plans to issue any preferred
shares, but we may do so. The rights of the holders of common shares may be
subject to, and adversely affected by, the rights of the holders of any
preferred shares that may be issued in the future. In addition, we have adopted
a classified board of directors. Our shareholders are unable to remove any
director or the entire board of directors without a super majority vote. In
addition, a super majority vote is required to approve transactions with
interested shareholders. Shareholders do not have the right to call a
shareholders meeting. We have adopted a shareholders' rights plan which under
certain circumstances would significantly impair the ability of third parties to
acquire control of us without prior approval of our Board of Directors. This
shareholders' rights plan and the provisions in our charter documents could make
it more difficult for a third party to acquire us, even if doing so would
benefit our shareholders.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Sensitivity
We have market risk primarily in connection with the pricing of our
products and services and the purchase of raw materials. Product pricing and raw
materials costs are both significantly influenced by semiconductor market
conditions. Historically, during cyclical industry downturns, we have been able
to offset pricing declines for our products through a combination of improved
product mix and success in obtaining price reductions in raw materials costs.
Inflation
We do not believe that inflation has had a material effect on our business,
financial condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or failure to do
so could adversely affect our business, financial condition and results of
operations.
Foreign Currency Exchange Rate Risk
The operation of the Company's subsidiaries in international markets
results in exposure to movements in currency exchange rates. We generally have
not been significantly affected by foreign exchange fluctuations because, until
recently, the Taiwan Dollar has proven to be relatively stable. However, during
2000 and 2001 we experienced significant foreign currency gains due to the
strengthening of the U.S. dollar. The potential of volatile foreign exchange
rate fluctuations in the future could have a significant effect on our results
of operations.
The principal currency involved is the New Taiwan Dollar. Garmin
Corporation, located in Shijr, Taiwan uses the local currency as the functional
currency. The Company translates all assets and liabilities at year-end exchange
rates and income and expense accounts at average rates during the year. In order
to minimize the effect of the currency exchange fluctuations on our net assets,
we have elected to retain most of our Taiwan subsidiary's cash in U.S. dollars.
As discussed above, the exchange rate can be volatile. While the net effect of
foreign currency moves in fiscal 2002 was neutral, there were significant shifts
in the exchange rate throughout 2002. The exchange rate increased 6.5% during
2001 and resulted in a foreign currency gain of $11.6 million. If the exchange
rate decreased by a similar percentage, a comparable foreign currency loss would
be recognized. A 10% positive or negative change in the US dollar exchange rate
versus the New Taiwan Dollar would have resulted in a foreign currency gain of
$18.7 million (positive 10% change) or a foreign currency loss of $18.9 million
(negative 10% change), respectively during 2002.
Interest Rate Risk
As of December 28, 2002, we have interest rate risk in connection with our
industrial revenue bonds that bear interest at a floating rate. Garmin
International, Inc. entered into two interest rate swap agreements, one on July
1, 2000 ($10.0 million notional) and another on February 6, 2001 ($5.0 million
notional), totaling $15.0 million to modify the characteristics of its
outstanding long-term debt from a floating rate to a fixed rate basis. These
agreements involve the receipt of floating rate amounts in exchange for fixed
rate interest payments over the life of the agreements without an exchange of
the underlying principal amount. The estimated fair value of the interest swap
agreements of $1.0 million is the amount we would be required to pay to
terminate the swap agreements at December 28, 2002. A 10% positive or negative
change in the floating counterparty interest rates associated with the swaps
would change the estimated fair value of the interest rate swap agreements to
$0.9 million (positive 10% change) or $1.1 million (negative 10% change),
respectively.
The Company's average outstanding debt during fiscal 2002 was approximately
$26 million. The average interest rate on debt during fiscal 2002 was 5.0%. The
average outstanding debt during fiscal year 2001 was approximately $39.3
million. The average interest rate on debt during fiscal 2001 was 5.5%. A 10%
positive or negative change in the average interest rate during fiscal 2002
would have resulted in interest expense of $1.4 million (positive 10% change) or
$1.2 million (negative 10% change), respectively. This compares to the actual
interest expense of $1.3 million during fiscal 2002.
In addition, at December 28, 2002 the Company is exposed to interest rate
risk in connection with its investments in marketable securities. As interest
rates change, the unrealized gains and losses associated with those securities
will fluctuate accordingly. A hypothetical change of 10% in interest rates would
not have a material effect on such unrealized gains and losses. At December 28,
2002 unrealized gains on those securities were $1.2 million.
Item 8. Financial Statements and Supplementary Data
CONSOLIDATED FINANCIAL STATEMENTS
Garmin Ltd. and Subsidiaries
Years Ended December 28, 2002, December 29, 2001, and December 30, 2000
Contents
Report of Independent Auditors................................................39
Consolidated Balance Sheets at December 28, 2002 and December 29, 2001........40
Consolidated Statements of Income for the Years Ended December 28, 2002,
December 29, 2001, and December 30, 2000...................................41
Consolidated Statements of Stockholders' Equity for the Years Ended
December 28, 2002, December 29, 2001, and December 30, 2000................42
Consolidated Statements of Cash Flows for the Years Ended December 28, 2002
December 29, 2001, and December 30, 2000...................................43
Notes to Consolidated Financial Statements....................................45
Report of Independent Auditors
The Board of Directors and Stockholders
Garmin Ltd.
We have audited the accompanying consolidated balance sheets of Garmin Ltd.
and subsidiaries (the Company) as of December 28, 2002 and December 29, 2001,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 28, 2002.
Our audits also included the financial statement schedule listed in the index at
Item 15(a)(2). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Garmin Ltd. and
subsidiaries at December 28, 2002 and December 29, 2001, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 28, 2002, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Kansas City, Missouri
January 31, 2003
Garmin Ltd. and Subsidiaries
Consolidated Balance Sheets
(In Thousands, Except Share and Per Share Information)
December 28, December 29,
2002 2001
------------------------------------
Assets
Current assets:
Cash and cash equivalents $216,768 $192,842
Marketable securities (Note 3) 113,336 40,835
Accounts receivable, less allowance for doubtful accounts of
$3,153 in 2002 and $2,627 in 2001 58,278 47,998
Inventories 57,507 61,132
Deferred income taxes (Note 8) 14,847 13,836
Prepaid expenses and other current assets 4,490 2,921
------------------------------------
Total current assets 465,226 359,564
Property and equipment (Note 5):
Land and improvements 20,517 20,414
Building and improvements 33,952 32,864
Office furniture and equipment 15,086 11,365
Manufacturing equipment 18,920 17,282
Engineering equipment 15,730 11,671
Vehicles 2,286 1,671
------------------------------------
106,491 95,267
Accumulated depreciation 32,051 25,181
------------------------------------
74,440 70,086
Restricted cash (Notes 5 and 6) 1,598 1,600
Marketable securities (Note 3) 132,372 90,749
License agreements, net 19,370 11,408
Other intangible assets 5,109 5,577
------------------------------------
Total assets $698,115 $538,984
====================================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 32,446 $18,837
Salaries and benefits payable 4,178 3,308
Accrued warranty costs 5,949 4,777
Accrued sales program costs 4,752 2,518
Other accrued expenses (Note 9) 8,000 2,967
Income taxes payable 18,080 19,273
Current portion of long-term debt (Note 5) - 4,177
------------------------------------
Total current liabilities 73,405 55,857
Long-term debt, less current portion (Note 5) 20,000 28,011
Deferred income taxes (Note 8) 2,211 1,147
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 shares authorized,
none issued - -
Common stock, $0.01 par value, 500,000,000 shares authorized
(Notes 12 and 13):
Shares issued and outstanding - 107,919,766 in 2002 and
107,774,918 in 2001 1,080 1,078
Additional paid-in capital 129,431 127,131
Retained earnings (Note 6) 507,884 365,087
Accumulated other comprehensive loss (35,896) (39,327)
------------------------------------
Total stockholders' equity 602,499 453,969
------------------------------------
Total liabilities and stockholders' equity $698,115 $538,984
====================================
See accompanying notes.
Garmin Ltd. and Subsidiaries
Consolidated Statements of Income
(In Thousands, Except Per Share Information)
Year Ended
-----------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
-----------------------------------------------------
Net sales $465,144 $369,119 $345,741
Cost of goods sold 210,088 170,960 162,015
-----------------------------------------------------
Gross profit 255,056 198,159 183,726
Selling, general, and administrative expenses 45,453 38,709 32,669
Research and development expense 32,163 28,164 21,764
-----------------------------------------------------
77,616 66,873 54,433
-----------------------------------------------------
Operating income 177,440 131,286 129,293
Other income (expense):
Interest income 6,466 11,164 6,925
Interest expense (1,329) (2,174) (2,287)
Foreign currency 11 11,573 6,962
Other 146 186 29
-----------------------------------------------------
5,294 20,749 11,629
-----------------------------------------------------
Income before income taxes 182,734 152,035 140,922
Income tax provision (benefit):
Current 40,510 40,610 39,723
Deferred (573) (2,023) (4,464)
-----------------------------------------------------
39,937 38,587 35,259
-----------------------------------------------------
Net income $142,797 $113,448 $105,663
=====================================================
Basic and diluted net income per share (Note 14) $ 1.32 $ 1.05 $ 1.05
=====================================================
See accompanying notes.
Garmin Ltd. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share and Per Share Information)
Accumulated
Common Stock Additional Other
---------------- Paid-In Retained Comprehensive
Shares Dollars Capital Earnings Loss Total
------------------------------------------------------------------------
Balance at December 25, 1999 100,000 $1,000 $29,593 $176,431 $(12,425) $194,599
Net income - - - 105,663 - 105,663
Translation adjustment - - - - (10,483) (10,483)
---------
Comprehensive income 95,180
Cash dividend ($0.29 per
share) - - - (28,954) - (28,954)
Issuance of common stock in
initial public offering,
net of offering costs 8,242 82 104,332 - - 104,414
--------------------------------------------------------------------------
Balance at December 30, 2000 108,242 1,082 133,925 253,140 (22,908) 365,239
Net income - - - 113,448 - 113,448
Translation adjustment - - - - (15,519) (15,519)
Adjustment related to
effective portion of cash
flow hedges, net of income
tax effects of $579 - - - - (900) (900)
---------
Comprehensive income 97,029
Issuance of common stock
from exercise of stock
options 5 1 70 - - 71
Issuance of common stock
through stock purchase plan 123 1 1,463 - - 1,464
Purchase and retirement of
common stock (595) (6) (8,327) (1,501) - (9,834)
--------------------------------------------------------------------------
Balance at December 29, 2001 107,775 1,078 127,131 365,087 (39,327) 453,969
Net income - - - 142,797 - 142,797
Translation adjustment - - - - 2,456 2,456
Adjustment related to
effective portion of cash
flow hedges, net of income
tax effects of $170 - - - - 263 263
Adjustment related to
unrealized gains on
available-for-sale
securities, net of income
tax effects of $455 - - - - 712 712
---------
Comprehensive income 146,228
Issuance of common stock
from exercise of stock
options 74 1 1,252 - - 1,253
Issuance of common stock
through stock purchase plan 70 1 1,048 - - 1,049
--------------------------------------------------------------------------
Balance at December 28, 2002 107,919 $1,080 $129,431 $507,884 $(35,896) $602,499
==========================================================================
See accompanying notes.
Garmin Ltd. and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands)
Year Ended
-----------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
-----------------------------------------------------
Operating activities
Net income $142,797 $113,448 $105,663
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 8,279 7,341 7,104
Amortization 7,852 3,527 465
(Gain) Loss on disposal of property and
equipment (7) 23 1,605
Provision for doubtful accounts 941 1,137 911
Provision for obsolete and slow-moving
inventories 688 4,000 5,915
Foreign currency translation 600 (5,593) (4,831)
Deferred income taxes (573) (2,023) (4,464)
Changes in operating assets and liabilities:
Accounts receivable (10,854) (17,894) (3,250)
Inventories 3,173 22,958 (48,024)
Prepaid expenses and other current assets (1,568) (447) (373)
Accounts payable 13,604 (2,657) 7,961
Accrued expenses 9,716 (1,016) 999
Income taxes payable 760 7,187 13,812
-----------------------------------------------------
Net cash provided by operating activities 175,408 129,991 83,493
Investing activities
Purchases of property and equipment (12,424) (14,883) (24,821)
Proceeds from sale of property and equipment 18 239 5,919
Purchases of marketable securities (869,112) (1,684,985) -
Sales of marketable securities 753,998 1,553,401 -
Purchase of assets of Sequoia Instruments, Inc. - (3,625) -
Purchases of licenses (13,525) (12,028) (4,251)
Change in restricted cash 2 4,239 (5,856)
Other (29) (748) 95
-----------------------------------------------------
Net cash used in investing activities (141,072) (158,390) (28,914)
Financing activities
Dividends - - (28,954)
Proceeds from issuance of common stock, net of
offering costs - - 104,414
Proceeds from issuance of common stock through stock
purchase plan 1,049 1,464 -
Proceeds from issuance of common stock from exercise
of stock options 1,026 71 -
Proceeds from issuance of Industrial Revenue Bonds - - 20,000
Principal payments on long-term debt (12,236) (14,189) -
Principal payments on notes payable - - (5)
Purchases of common stock - (9,834) -
-----------------------------------------------------
Net cash (used in) provided by financing activities (10,161) (22,488) 95,455
Effect of exchange rate changes on cash (249) (8,002) (2,382)
-----------------------------------------------------
Net increase (decrease) in cash and cash equivalents 23,926 (58,889) 147,652
Cash and cash equivalents at beginning of year 192,842 251,731 104,079
-----------------------------------------------------
Cash and cash equivalents at end of year $216,768 $192,842 $251,731
=====================================================
Garmin Ltd. and Subsidiaries
Consolidated Statements of Cash Flows (continued)
(In Thousands)
Year Ended
-----------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
-----------------------------------------------------
Supplemental disclosures of cash flow information
Cash paid during the year for income taxes $39,992 $38,844 $28,788
=====================================================
Cash received during the year from income tax refunds $ - $ - $ 12
=====================================================
Cash paid during the year for interest, net of $405
of capitalized interest in 2000 $ 1,325 $ 2,011 $ 2,223
=====================================================
Supplemental disclosures of non-cash investing and
financing activities
Change in liability recognized in accrued expenses
related to cash flow hedges and charge to
accumulated other comprehensive loss $ 433 $ 1,479 $ -
=====================================================
Change in marketable securities related to
unrealized appreciation $ 1,167 $ - $ -
=====================================================
See accompanying notes.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In Thousands, Except Share and Per Share Information)
December 28, 2002 and December 29, 2001
1. Organization
On July 24, 2000, the stockholders of Garmin Corporation (GARMIN)
incorporated Garmin Ltd. (the Company) under the laws of the Cayman Islands.
Subsequently, the stockholders of GARMIN executed a Shareholders Agreement to
transfer to Garmin Ltd. their investments in 88,988,394 common shares of stock
of GARMIN. These shares, which represented approximately 100% of the issued and
outstanding common stock of GARMIN as of July 24, 2000, were used by the
stockholders to pay for their subscriptions to 100,000,000 common shares of
Garmin Ltd. at a par value of $0.01 or an aggregate value of $1,000. As such,
the exchange of shares in this reorganization between GARMIN and the newly
formed holding company, Garmin Ltd., completed on September 22, 2000, has been
accounted for at historical cost similar to that in pooling-of-interests
accounting. Until April 15, 2002, one share of GARMIN stock was held by each of
six shareholders as nominees under nominee trusts in order to comply with
Article 2 of the Company Law of Taiwan which required that, as a "company
limited by stock", GARMIN have at least seven shareholders, and 4,000 shares of
GARMIN were held by two shareholders who did not convert their GARMIN shares to
common shares of the Company. These 4,006 shares represented approximately
0.004% of the outstanding shares of GARMIN. Taiwan company law was recently
changed to remove the requirement that a Taiwan company have a minimum of seven
shareholders and to permit single shareholder companies. As of April 15, 2002,
the Company has acquired the 4,000 shares of GARMIN that were held by the two
shareholders and the six nominee shareholders have each transferred their own
share of GARMIN stock to the Company. As a result, the Company now owns all of
the outstanding shares of GARMIN. As discussed in Note 12, Garmin Ltd. completed
an initial public offering of its common stock in December 2000.
2. Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States.
Accordingly, the accompanying consolidated financial statements reflect the
accounts of Garmin Ltd. and its wholly owned subsidiaries as if the
reorganization described in Note 1 was effective for all periods presented. All
significant inter-company balances and transactions have been eliminated.
Nature of Business
Garmin Ltd. and subsidiaries (together, the Company) manufacture, market,
and distribute Global Positioning System-enabled products and other related
products. GARMIN was incorporated in Taiwan, Republic of China on January 16,
1990. GARMIN is primarily responsible for the manufacturing and distribution of
the Company's products to Garmin International, Inc. (GII) and Garmin (Europe)
Limited (GEL) and, to a lesser extent, new product development and sales and
marketing of the Company's products in Asia and the Far East. In April 1990, a
100%-owned subsidiary, Garmin International, Inc., was incorporated in the
United States. GII is primarily responsible for sales and marketing of the
Company's products in many international markets and in the United States as
well as research and new product development. GII also manufactures certain
products for the Company's aviation segment. During June 1992, GII formed Garmin
(Europe) Limited, a wholly owned subsidiary in the United Kingdom, to sell its
products principally within the European market. During 2000, GII sold its
interest in GEL to Garmin Ltd. As a result, GEL is now a direct subsidiary of
Garmin Ltd. Also during 2000, Garmin Realty LLC was formed by GII to hold
certain real estate. In December 2001, GII formed Garmin USA as a sales
organization.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
Fiscal Year
The Company has adopted a 52-53-week period ending on the last Saturday of
the calendar year. Due to the fact that there are not exactly 52 weeks in a
calendar year and there is slightly more than one additional day per year (not
including the effects of leap year) in each calendar year as compared to a
52-week fiscal year, the Company will have a fiscal year comprising 53 weeks in
certain fiscal years, as determined by when the last Saturday of the calendar
year occurs.
In those resulting fiscal years that have 53 weeks, the Company will record
an extra week of sales, costs, and related financial activity. Therefore, the
financial results of those fiscal years, and the associated 14-week quarter,
will not be exactly comparable to the prior and subsequent 52-week fiscal years
and the associated quarters having only 13 weeks. Fiscal 2002 and 2001 included
52 weeks while fiscal 2000 was comprised of 53 weeks.
Foreign Currency Translation
GARMIN utilizes the New Taiwan Dollar as its functional currency. Prior to
2001, GEL utilized the British pound sterling as its functional currency.
However, as a result of an increase in United States dollar-denominated
transactions, GEL changed its functional currency to the United States dollar
effective December 31, 2000. The impact of this change was not material. In
accordance with Statement of Financial Accounting Standards (SFAS) No. 52,
Foreign Currency Translation, the financial statements of GARMIN for all periods
presented and GEL for fiscal 2000 have been translated into United States
dollars, the functional currency of Garmin Ltd. and GII, and the reporting
currency herein, for purposes of consolidation at rates prevailing during the
year for sales, costs, and expenses and at end-of-year rates for all assets and
liabilities. The effect of this translation is recorded in a separate component
of stockholders' equity. Cumulative translation adjustments of $35,971 and
$38,427 as of December 28, 2002 and December 29, 2001, respectively, have been
included in accumulated other comprehensive loss in the accompanying
consolidated balance sheets.
Transactions in foreign currencies are recorded at the approximate rate of
exchange at the transaction date. Assets and liabilities resulting from these
transactions are translated at the rate of exchange in effect at the balance
sheet date. All differences are recorded in results of operations and amounted
to exchange gains of approximately $11, $11,573, and $6,962 for the years ended
December 28, 2002, December 29, 2001, and December 30, 2000, respectively. The
gain in fiscal 2002 is not material due to insignificant changes in the exchange
rates during the year. The gain in fiscal 2001 is the result of the
strengthening of the United States dollar compared to the New Taiwan Dollar in
the second and fourth quarters of fiscal 2001 while the gain in fiscal 2000 is
principally attributable to the strengthening of the United States dollar
compared to the New Taiwan Dollar in the fourth quarter of fiscal 2000. These
gains are included in other income in the accompanying consolidated statements
of income.
Earnings Per Share
Basic earnings per share amounts are computed based on the weighted-average
number of common shares outstanding. For purposes of diluted earnings per share,
the number of shares that would be issued from the exercise of dilutive stock
options has been reduced by the number of shares which could have been purchased
from the proceeds of the exercise at the average market price of the Company's
stock during the period the options were outstanding. See Note 14.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, operating accounts, money market funds, and securities with
maturities of three months or less when purchased. The carrying amount of cash
and cash equivalents approximates fair value, given the short maturity of those
instruments.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the weighted-average method (which approximates the first-in, first-out
(FIFO) method) by GARMIN and the FIFO method by GII and GEL. Inventories
consisted of the following:
December 28, December 29,
2002 2001
-------------------------------------
Raw materials $24,177 $26,381
Work-in-process 10,936 9,582
Finished goods 31,818 34,723
Inventory reserves (9,424) (9,554)
-------------------------------------
$57,507 $61,132
=====================================
Property and Equipment
Property and equipment are recorded at cost and depreciated using the
straight-line method over the following estimated useful lives:
Buildings and improvements 8-55 years
Office furniture and equipment 3-8 years
Manufacturing and engineering equipment 3-8 years
Vehicles 3-5 years
Long-Lived Assets
In accordance with SFAS No. 144, Accounting for the Impairment or Disposal
of Long-Lived Assets, the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an
asset may not be fully recoverable. The carrying amount of a long-lived asset is
not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. That assessment shall
be based on the carrying amount of the asset at the date it is tested for
recoverability. An impairment loss shall be measured as the amount by which the
carrying amount of a long-lived asset exceeds its fair value. SFAS No. 144 has
not had an impact on the company's consolidated financial statements.
Intangible Assets
On December 30, 2001, the Company adopted SFAS No. 142, Goodwill and Other
Intangible Assets. The statement addresses how goodwill and other intangible
assets should be accounted for and tested for impairment. The standard requires
intangibles to be identified as either finite-lived or indefinite lived.
Indefinite-lived intangible assets are no longer subject to amortization, yet
are to be tested for impairment annually and on an interim basis if events or
changes in circumstances between annual tests indicate that the asset might be
impaired. The impairment test requires the determination of the fair value of
the intangible asset. If the fair value of the intangible asset is less than its
carrying value, an impairment loss should be recognized in an amount equal to
the difference. The asset will then be carried at its new fair value. Finite
lived intangible assets are still subject to amortization and are reviewed
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
for impairment in accordance with SFAS No. 144. The adoption of this statement
did not have a material impact on the Company.
Finite-lived intangible assets principally consist of costs incurred with
certain licensing agreements with a net book value of approximately $19,370 and
$11,408 at December 28, 2002 and December 29, 2001, respectively. Licenses are
being amortized over the lives of the related license agreements, which are
generally three years. Accumulated amortization is approximately $10,377 and
$5,100 at December 28, 2002 and December 29, 2001, respectively.
Other intangible assets consist of patents as well as goodwill and other
intangible assets acquired in the Company's purchase of Sequoia Instruments,
Inc. in November 2001. The total purchase price of $3,625 was allocated to
goodwill, developed technology, and other intangibles. The purchase included
additional consideration of $1,000 contingent on the completion of certain
activities expected to occur in 2003 and thereafter.
Patents and other finite lived intangible assets with a net book value of
$3,153 and $2,725 are being amortized over the estimated useful lives of the
related assets, which is generally five to ten years. Accumulated amortization
is $547 and $391 at December 28, 2002 and December 29, 2001, respectively. No
amortization expense was recorded related to goodwill during 2002 as a result of
adopting SFA No. 142.
Marketable Securities
Management determines the appropriate classification of marketable
securities at the time of purchase and reevaluates such designation as of each
balance sheet date.
Debt securities not classified as held-to-maturity and marketable equity
securities not classified as trading are classified as available-for-sale. All
of the Company's marketable securities are considered available-for-sale at
December 28, 2002. See Note 3. Available-for-sale securities are stated at fair
value, with the unrealized gains and losses, net of tax, reported in other
comprehensive income. During 2002, significant unrealized gains of $1,167 were
reported in other comprehensive income, net of related taxes.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity, or
in the case of mortgage-backed securities, over the estimated life of the
security. Such amortization is included in interest income from investments.
Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). The cost of
securities sold is based on the specific identification method. Realized gains
and losses on available-for-sale securities were not material.
Income Taxes
The Company accounts for income taxes using the liability method in
accordance with SFAS No. 109, Accounting for Income Taxes. The liability method
provides that deferred tax assets and liabilities are recorded based on the
difference between the tax bases of assets and liabilities and their carrying
amount for financial reporting purposes as measured by the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. Income
taxes have not been accrued at the GARMIN level for the unremitted earnings of
GII totaling approximately $122,315 and $96,948 at December 28, 2002 and
December 29, 2001, respectively, because such earnings are intended to be
reinvested in this subsidiary indefinitely. Income taxes have also not been
accrued by the Company for the unremitted earnings of GARMIN or GEL because such
earnings are also intended to be reinvested in these subsidiaries indefinitely.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
Concentration of Credit Risk
The Company grants credit to certain customers who meet the Company's
pre-established credit requirements. Generally, the Company does not require
security when trade credit is granted to customers. Credit losses are provided
for in the Company's consolidated financial statements and consistently have
been within management's expectations.
Revenue Recognition
The Company recognizes revenue from product sales when the product is
shipped to the customer and title has transferred. The Company assumes no
remaining significant obligations associated with the product sale other than
that related to its warranty programs discussed below.
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold in the
accompanying consolidated financial statements.
Product Warranty
The Company provides for estimated warranty costs at the time of sale. The
warranty period is generally for one year from date of shipment with the
exception of certain aviation products for which the warranty period is two
years from the date of installation.
Sales Programs
The Company provides certain monthly and quarterly incentives for its
dealers based on various factors including dealer purchasing volume and growth.
Additionally, the Company provides rebates to end users on certain products.
Estimated rebates and incentives payable to distributors are regularly reviewed
and recorded as accrued expenses on a monthly basis. These rebates and
incentives are recorded as reductions to net sales in the accompanying
consolidated statements of income.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
charged to operations amounted to approximately $16,670, $14,714, and $11,529
for the years ended December 28, 2002, December 29, 2001, and December 30, 2000,
respectively.
Research and Development
Substantially all research and development is performed by GII in the
United States. Research and development costs, which are expensed as incurred,
amounted to approximately $32,163, $28,164, and $21,764, for the years ended
December 28, 2002, December 29, 2001, and December 30, 2000, respectively.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
Accounting for Stock-Based Compensation
At December 28, 2002, the company has two stock-based employee compensation
plans, which are described more fully in Note 13. The company accounts for those
plans under the recognition and measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. No
stock-based employee compensation cost is reflected in net income, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the company had
applied the fair value recognition provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, to stock-based employee compensation.
December 28, December 29, December 30,
2002 2001 2000
-------------------------------------------------
Net income as reported $142,797 $113,448 $105,663
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards, net
of tax effects (1,949) (1,298) (83)
-------------------------------------------------
Pro forma net income $140,848 $112,150 $105,580
=================================================
Pro forma net income per share:
Basic $ 1.31 $ 1.04 $ 1.05
Diluted $ 1.30 $ 1.03 $ 1.05
Derivative Investments and Hedging Activities
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities, effective December 31, 2000, the beginning of fiscal 2001.
This statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives not considered hedges must be adjusted to fair
value through income.
If a derivative is a hedge, depending on the nature of the hedge, changes
in the fair value of the derivative will either be offset against the change in
fair value of the hedged asset, liability or firm commitment through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
GII has entered into interest rate swap agreements to modify the interest
characteristics of portions of its outstanding long-term debt from a floating
rate to a fixed rate basis. These agreements involve the receipt of floating
rate amounts in exchange for fixed rate interest payments over the life of the
agreements without an exchange of the underlying principal amount. The
differential to be paid or received is accrued as interest rates change and
recognized as an adjustment to interest expense related to the debt. The related
amount payable to or receivable from the counterparty is included in other
liabilities or assets. The Company's agreements qualify for hedge accounting as
permitted in SFAS No. 133, resulting in the agreement's being marked to market
at each balance sheet date through other comprehensive income. Management
assesses the effectiveness of the hedge relationship on a periodic basis during
the year. See Note 9.
Recent Pronouncements
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." The provisions of this
Statement are effective for exit or disposal activities initiated after December
31, 2002. The Company does not expect that the adoption of this statement will
have a significant impact on the Company's financial position as no exit or
disposal activities are currently planned.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
2. Summary of Significant Accounting Policies (continued)
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation -- Transition and Disclosure. This statement requires all entities
with stock-based employee compensation arrangements to provide additional
disclosures in their summary of significant accounting policies note. Since the
Company uses the intrinsic value method of APB Opinion No. 25, Accounting for
Stock Issued to Employees, the accounting policies note will include a tabular
presentation of pro forma net income and earnings per share using the fair value
method prescribed by SFAS No. 123, Accounting for Stock-Based Compensation.
Also, SFAS No. 148 permits entities changing to the fair value method of
accounting for employee stock compensation to choose from one of three
transition methods -- the prospective method, the modified prospective method,
or the retroactive restatement method. Finally, SFAS No. 148 will require the
Company to make interim-period pro forma disclosures if stock-based compensation
is accounted for under the intrinsic value method in any period presented. The
expanded annual disclosure requirements and the transition provisions are
effective for the Company's fiscal year 2002. The new interim period disclosures
are required in the Company's financial statements for interim periods beginning
in the first quarter of fiscal 2003. The Company does not expect that the
adoption of this statement will have a material impact on its results of
operations or financial position.
Reclassifications
Certain amounts in the fiscal 2000 and 2001 consolidated financial
statements have been reclassified to conform with the fiscal 2002 presentation.
3. Marketable Securities
The following is a summary of the Company's marketable securities
classified as available-for-sale securities at December 28, 2002:
Estimated Fair
Gross Unrealized Value (Net
Amortized Cost Gains Carrying Amount)
-----------------------------------------------------------
Mortgage-backed securities $58,038 $386 $58,424
Obligations of states and political
subdivisions 86,006 595 86,601
U.S. corporate bonds 79,572 185 79,757
Other 20,925 1 20,926
-----------------------------------------------------------
Total $244,541 $1,167 $245,708
===========================================================
The following is a summary of the Company's marketable securities
classified as available-for-sale securities at December 29, 2001:
Estimated Fair
Gross Unrealized Value (Net
Amortized Cost Gains Carrying Amount)
-----------------------------------------------------------
Mortgage-backed securities $31,320 $ - $31,320
Obligations of states and political
subdivisions 55,116 - 55,116
U.S. corporate bonds 39,575 - 39,575
Other 5,573 - 5,573
-----------------------------------------------------------
Total $131,584 $ - $131,584
===========================================================
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
3. Marketable Securities (continued)
The amortized cost and estimated fair value of marketable securities at
December 28, 2002, 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.
Estimated
Cost Fair Value
-------------------------------
Due in one year or less (2003) $113,289 $113,336
Due after one year through five years (2004 - 2008) 119,380 120,393
Due after five years through ten years (2009 - 2013) 11,872 11,979
Due after ten years (2014 and thereafter) - -
----------------------------------
$244,541 $245,708
==================================
4. Line of Credit
During December 2000, the Company renewed a line of credit agreement with a
bank providing for maximum borrowings of $5,000 less indirect borrowings under
certain standby letters of credit which totaled approximately $4,000 at December
30, 2000. There were no direct or indirect borrowings outstanding under the line
of credit as of December 30, 2000. The line of credit, which bears interest at
the bank's prime rate less 1% or LIBOR plus 1.5%, expired June 28, 2001 and was
unsecured.
5. Long-Term Debt
During 1995, GII entered into an agreement with the City of Olathe, Kansas
for the construction of a new corporate headquarters (the project) which was
financed through issuance of Series 1995 Industrial Revenue Bonds (the Bonds)
totaling $9,500. Upon completion of the project in 1996, GII retired bonds
totaling $155. During 2002, GII retired the remaining Bonds totaling $9,345.
During 1999, GARMIN borrowed $18,040 to finance the purchase of land and a
new manufacturing facility in Taiwan. The balance was due in 60 equal payment of
principal plus interest beginning in November 2001. Through November 2001,
interest was payable at a fixed rate of 6.155%. Subsequent to November 2001,
interest is adjustable based on the Republic of China's government preferential
rate on term deposits plus 0.18%. The Company opted to prepay a significant
portion of the outstanding principal during 2001. The outstanding balance of
$2,891 at December 29, 2001 was paid in full in January 2002.
During 2000, GII entered into another agreement with the City of Olathe,
Kansas to finance the Company's expansion of its manufacturing facilities
through the issuance of Series 2000 Industrial Revenue Bonds (the 2000 Bonds)
totaling $20,000. The proceeds from the issuance of the 2000 Bonds were placed
in an interest-bearing restricted cash account controlled by a trustee appointed
by the issuer. Disbursements from the account are restricted to purchases of
equipment and construction related to the project and amounted to $0 and $5,696
for years ended December 28, 2002 and December 29, 2001, respectively. There
were no unexpended bond proceeds in this restricted cash account at December 28,
2002.
At December 28, 2002 and December 29, 2001, outstanding principal under the
2000 Bonds totaled $20,000. Interest on the 2000 Bonds is payable monthly at a
variable interest rate (1.51% at December 28, 2002), which is adjusted weekly to
the current market rate as determined by the remarketing agent of the 2000 Bonds
with principal due upon maturity at April 15, 2020. See Note 9.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
5. Long-Term Debt (continued)
The 2000 Bonds are secured by an irrevocable letter of credit totaling
$20,288 with facility fees of 0.75%. This renewable letter of credit initially
expires on September 20, 2004.
The bank has required a sinking fund be established with payments beginning
April 2004 of $4,002 and semiannual payments of $667 thereafter. The payments
are to be made to a legally restricted bank account. Principal and sinking fund
payments on long-term debt are as follows:
Year Sinking Fund Principal
---- ------------- ---------
2003 $ - $ -
2004 4,002 -
2005 1,334 -
2006 1,334 -
2007 1,334 -
Thereafter 11,996 20,000
------ ------
$20,000 $20,000
======= =======
6. Leases and Other Commitments
Rental expense related to office and warehouse space for GEL amounted to
$281, $232, and $139 for the years ended December 28, 2002, December 29, 2001,
and December 30, 2000, respectively. Future minimum lease payments on the
related lease are $236 per year through 2007. In the years 2008 through lease
expiration in 2015, total future minimum lease payments are $1,886.
At December 28, 2002 and December 29, 2001, standby letters of credit
amounting to $509 and $871, respectively, were issued by banks on behalf of the
Company.
Approximately $50,669 and $39,000 of GARMIN's retained earnings are
indefinitely restricted from distribution to stockholders pursuant to the law of
Taiwan at December 28, 2002 and December 29, 2001, respectively.
Certain cash balances of GEL are held as collateral by a bank securing
payment of the United Kingdom value-added tax requirements. These amounted to
$1,598 and $1,600 at December 28, 2002 and December 29, 2001, respectively, and
are reported as restricted cash.
7. Employee Benefit Plans
GII has an employee savings plan under which its employees may contribute
up to 15% of their annual compensation subject to Internal Revenue Code maximum
limitations. Additionally, GEL has a defined contribution plan under which its
employees may contribute up to 5% of their annual compensation. Both GII and GEL
contribute an amount determined annually at the discretion of the Board of
Directors. During the years ended December 28, 2002, December 29, 2001, and
December 30, 2000, expense related to these plans of $1,467, $1,172, and $1,144,
respectively, was charged to operations.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
7. Employee Benefit Plans (continued)
Additionally, GII has a defined contribution money purchase plan (the MPP
Plan) which covers substantially all employees. GII contributes a specified
percentage of each participant's annual compensation up to certain limits as
defined in the MPP Plan. During the years ended December 28, 2002, December 29,
2001, and December 30, 2000, GII recorded expense related to the MPP Plan of
$1,261, $1,184, and $849, respectively.
8. Income Taxes
The Company's income tax provision (benefit) consists of the following:
Year Ended
------------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
Federal:
Current $18,576 $10,208 $14,638
Deferred (1,639) (338) (450)
------------------------------------------------------
16,937 9,870 14,188
State:
Current (1,035) 2,237 3,479
Deferred (328) (74) (2,051)
------------------------------------------------------
(1,363) 2,163 1,428
Foreign:
Current 22,969 28,165 21,606
Deferred 1,394 (1,611) (1,963)
------------------------------------------------------
24,363 26,554 19,643
------------------------------------------------------
Total $39,937 $38,587 $35,259
======================================================
The income tax provision differs from the amount computed by applying the
statutory federal income tax rate to income before taxes. The sources and tax
effects of the differences are as follows:
Year Ended
------------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
Federal income tax expense at
U.S. statutory rate $63,957 $53,212 $49,323
State income tax expense, net of federal
tax effect 886 1,406 928
Foreign tax rate differential (16,759) (13,640) (9,623)
Taiwan tax incentives and credits (10,757) (3,260) (5,181)
Other, net 2,610 869 (188)
------------------------------------------------------
Income tax expense $39,937 $38,587 $35,259
======================================================
The Company's income before income taxes attributable to foreign operations
was $146,804, $120,550, and $99,171, for the years ended December 28, 2002,
December 29, 2001, and December 30, 2000, respectively. The tax incentives and
credits received from Taiwan included in the table above reflect $0.10, $0.03,
and $0.05 per weighted-average common share outstanding for the years ended
December 28, 2002, December 29, 2001, and December 30, 2000, respectively. The
Company currently expects to benefit from the incentives and credits being
offered by Taiwan through 2007, at which time these tax benefits expire.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
8. Income Taxes (continued)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities are as follows:
December 28, December 29,
2002 2001
---------------------------
Deferred tax assets:
Product warranty accruals $1,707 $1,833
Allowance for doubtful accounts 1,088 888
Inventory carrying value 2,777 2,241
Sales program allowances 3,249 1,696
Vacation accrual 507 438
Interest rate swaps 408 579
Unrealized intercompany profit in inventory 4,994 6,829
Other 117 46
---------------------------
14,847 14,550
Deferred tax liabilities:
Unrealized investment gain 455 -
Unrealized foreign currency gains 623 844
Depreciation 1,133 1,017
---------------------------
2,211 1,861
---------------------------
Net deferred tax assets $12,636 $12,689
===========================
9. Interest Rate Risk Management
During 1996, GII entered into an interest rate swap agreement to
effectively convert a portion of its floating rate long-term debt associated
with the Bonds to a fixed rate basis, thus, reducing the impact of interest rate
changes on future income. The agreement was renewed in 2001. Pursuant to this
"pay-fixed" swap agreement, GII agreed to exchange, at specified intervals, the
difference between the fixed and the floating interest amounts calculated on the
notional amount of the swap agreement totaling $5,000 at December 28, 2002 and
December 29, 2001. GII's fixed interest rate under the swap agreement is 5.1%.
The counterparty's floating rate is based on the nontaxable PSA Municipal Swap
Index and amounted to 1.18% and 1.75% at December 28, 2002 and December 29,
2001, respectively. Notional amounts do not quantify risk or represent assets
and liabilities of the Company, but are used in the determination of cash
settlements under the agreement. The Company is exposed to credit losses from
counterparty nonperformance but does not anticipate any losses from its
agreement, which is with a major financial institution. The agreement expires
June 6, 2004.
During 2000, GII entered into an additional swap agreement to effectively
convert a portion of additional floating rate long-term debt associated with the
2000 Bonds to a fixed rate basis. Pursuant to this pay-fixed swap agreement, GII
agreed to exchange, at specified intervals, the difference between the fixed and
the floating interest amounts calculated on the notional amount of the swap
agreement totaling $10,000 at December 28, 2002 and December 29, 2001. GII's
fixed interest rate under the swap agreement is 7.26% compared to the
counterparty's floating rate of 1.51% and 2.1% at December 28, 2002 and December
29, 2001, respectively. The counterparty's floating rate is based on the bank's
Taxable Low Floater Rate. The Company is exposed to credit losses from
counterparty nonperformance but does not anticipate any losses from its
agreement, which is with a major financial institution. The agreement expires
June 1, 2004.
The fair value of the interest rate swap agreements is recorded as a
component of other accrued expenses and amounted to $1,046 and $1,479 at
December 28, 2002 and December 29, 2001, respectively. None of the Company's
cash flow hedges were deemed ineffective.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
9. Interest Rate Risk Management (continued)
At December 28, 2002, the Company expects to reclassify $748 of loss on the
interest rate swaps from accumulated other comprehensive loss to earnings during
the next 12 months related to the payment of variable interest on floating rate
debt, assuming market interest rates remain consistent with rates at that date.
10. Fair Value of Financial Instruments
In accordance with SFAS No. 107, Disclosures about Fair Value of Financial
Instruments, the following summarizes required information about the fair value
of certain financial instruments for which it is currently practicable to
estimate such value. None of the financial instruments are held or issued for
trading purposes. The carrying amounts and fair values of the Company's
financial instruments are as follows:
December 28, 2002 December 29, 2001
-----------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------------------------
Cash and cash equivalents $216,768 $216,768 $192,842 $192,842
Restricted cash 1,598 1,598 1,600 1,600
Marketable securities 245,708 245,708 131,584 131,584
Interest rate swap agreements
(liability) 1,046 1,046 1,479 1,479
Long-term debt:
Term loan - - 2,843 2,843
Series 1995 Bonds - - 9,345 9,345
Series 2000 Bonds 20,000 20,000 20,000 20,000
The carrying value of cash and cash equivalents, restricted cash,
marketable securities, and interest rate swap agreements approximates their fair
value. The fair values of the Company's floating-rate long-term debt have been
estimated to be the par value of the debt due to the variable interest rate
nature of the instruments. The fair values of long-term debt as reported are not
necessarily the amounts the Company would currently have to pay to extinguish
any of this debt.
11. Segment Information
The Company operates within its targeted markets through two reportable
segments, those being related to products sold into the consumer and aviation
markets. Both of the Company's reportable segments offer products through the
Company's network of independent dealers and distributors. However, the nature
of products and types of customers for the two segments vary significantly. As
such, the segments are managed separately. The Company's consumer segment
includes portable global positioning system (GPS) receivers and accessories for
marine, recreation, land, and automotive use sold primarily to retail outlets.
The Company's aviation products are portable and panel mount avionics for Visual
Flight Rules and Instrument Flight Rules navigation and are sold primarily to
aviation dealers and certain aircraft manufacturers.
The Company's Chief Executive Officer has been identified as the Chief
Operating Decision Maker (CODM). The CODM evaluates performance and allocates
resources based on income before income taxes of each segment. Income before
income taxes represents net sales less operating expenses including certain
allocated general and administrative costs, interest income and expense, foreign
currency adjustments, and other non-operating corporate expenses. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. There are no inter-segment sales or
transfers.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
11. Segment Information (continued)
The identifiable assets associated with each reportable segment reviewed by
CODM include accounts receivable and inventories. The Company does not report
property and equipment, depreciation and amortization, or capital expenditures
by segment to the CODM.
Revenues, interest income and interest expense, income before income taxes,
and identifiable assets for each of the Company's reportable segments are
presented below:
Year Ended December 28, 2002
------------------------------------------------------
Consumer Aviation Total
------------------------------------------------------
Net sales to external customers $350,674 $114,470 $465,144
Allocated interest income 4,875 1,591 6,466
Allocated interest expense 1,002 327 1,329
Income before income taxes 134,859 47,876 182,735
Assets:
Accounts receivable 43,942 14,336 58,278
Inventory 43,360 14,147 57,507
Year Ended December 29, 2001
------------------------------------------------------
Consumer Aviation Total
------------------------------------------------------
Net sales to external customers $263,358 $105,761 $369,119
Allocated interest income 7,960 3,204 11,164
Allocated interest expense 1,550 624 2,174
Income before income taxes 102,511 49,524 152,035
Assets:
Accounts receivable 34,222 13,776 47,998
Inventory 43,587 17,545 61,132
Year Ended December 30, 2000
------------------------------------------------------
Consumer Aviation Total
------------------------------------------------------
Net sales to external customers $230,183 $115,558 $345,741
Allocated interest income 4,610 2,315 6,925
Allocated interest expense 1,522 765 2,287
Income before income taxes 88,103 52,819 140,922
Assets:
Accounts receivable 21,791 10,928 32,719
Inventory 59,843 30,012 89,855
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
11. Segment Information (continued)
Net sales, long-lived assets (property and equipment), and net assets by
geographic area are as follows as of and for the years ended December 28, 2002,
December 29, 2001, and December 30, 2000:
North America Asia Europe Total
-----------------------------------------------------------------------
December 28, 2002
Net sales to external customers $339,415 $22,673 $103,056 $465,144
Long-lived assets 43,599 30,374 467 74,440
Net assets 232,430 348,255 21,814 602,499
December 29, 2001
Net sales to external customers $275,630 $15,039 $78,450 $369,119
Long-lived assets 40,183 29,321 582 70,086
Net assets 209,499 228,270 16,200 453,969
December 30, 2000
Net sales to external customers $256,782 $16,569 $72,390 $345,741
Long-lived assets 32,737 31,453 514 64,704
Net assets 197,897 154,095 13,247 365,239
No single customer accounted for 10% or more of the Company's consolidated net
sales in any period.
12. Initial Public Offering
On December 8, 2000, the Company completed an underwritten initial public
offering of 12,075,000 (including shares sold pursuant to the underwriters'
over-allotment option) shares of its common stock, 8,242,111 shares of which
were offered by the Company (the Offering) at an offering price of $14.00 per
share. Prior to but in connection with the offering, the Board of Directors
approved a 1.12379256-for-1 stock split of the Company's common shares, effected
through a stock dividend on November 6, 2000. All share and per share
information included in the accompanying consolidated financial statements has
been adjusted to give retroactive effect to the common stock split.
13. Stock Compensation Plans
The Company sponsors several stock compensation plans. The Company accounts
for all of these plans under APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. Accordingly, as all awards are granted
at the fair market value on the date of grant, no compensation expense is
recognized.
The various plans are summarized below:
2000 Equity Incentive Plan
In October 2000, the stockholders adopted an equity incentive plan (the
Plan) providing for grants of incentive and nonqualified stock options and
"other" stock compensation awards to employees of the Company and its
subsidiaries, pursuant to which up to 3,500,000 shares of common stock are
available for issuance. The stock options generally vest over a period of five
years or as otherwise determined by the Board of Directors or the Compensation
Committee and generally expire ten years from the date of grant, if not
exercised. Option activity under the Plan during 2002 and 2001 is summarized
below. There have been no "other" stock compensation awards granted under the
Plan.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
13. Stock Compensation Plans (continued)
2000 Non-employee Directors' Option Plan
Also in October 2000, the stockholders adopted a stock option plan for
non-employee directors (the Directors Plan) providing for grants of options for
up to 50,000 common shares of the Company's stock. The term of each award is ten
years. All awards vest evenly over a three-year period. During 2002 and 2001,
options to purchase 5,058 and 5,325 shares were granted under this plan.
A summary of the Company's stock option activity and related information
under the Equity Incentive Plan and 2000 Non-employee Directors' Option Plan for
the years ended December 28, 2002 and December 29, 2001 is provided below:
Weighted-Average
Exercise Price Number of Shares
------------------------------------
(In Thousands)
Outstanding at December 30, 2000 $14.00 1,176
Granted 19.96 374
Exercised 14.00 (5)
Canceled 14.00 (10)
-----------
Outstanding at December 29, 2001 15.45 1,535
Granted 29.61 453
Exercised 14.15 (74)
Canceled 16.58 (40)
-----------
Outstanding at December 28, 2002 18.90 1,874
===========
Outstanding options at December 30, 2000 were granted during 2000. No
options were exercised or cancelled during 2000.
December 28, December 29 December 30,
2002 2001 2000
----------------------------------------------
Weighted-average fair value
of options granted during the $11.42 $12.28 $ 8.53
year
The weighted-average remaining contract life for options outstanding at
December 28, 2002 is approximately nine years. Options outstanding at December
28, 2002 have exercise prices ranging from $14.00 to $29.79. At December 28,
2002, options to purchase 520,156 shares are exercisable.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. SFAS No. 123 requires the pro forma information be
determined as if the Company has accounted for its employee stock options under
the fair value method of that statement. As described below, the fair value
accounting provided under SFAS No. 123 requires the use of option valuation
models that were not developed for use in valuing employee stock options. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2002, 2001 and 2000: risk-free interest rate of 1.67%, 5.11%,
and 5.75% respectively; no dividend yield; volatility factor of the expected
market price of the Company's common stock of 0.3395, 0.591 and 0.530,
respectively; and a weighted-average expected life of the option of seven years.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
13. Stock Compensation Plans (continued)
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
Employee Stock Purchase Plan
The stockholders also adopted an employee stock purchase plan (ESPP). Up to
1,000,000 shares of common stock have been reserved for the ESPP. Shares will be
offered to employees at a price equal to the lesser of 85% of the fair market
value of the stock on the date of purchase or 85% of the fair market value on
the enrollment date. The ESPP is intended to qualify as an "employee stock
purchase plan" under Section 423 of the Internal Revenue Code. During 2002 and
2001, 70,000 and 123,007 shares were purchased under the plan for a total
purchase price of $1,265 and $1,464, respectively. No shares were purchased
during 2000. At December 28, 2002, approximately 807,000 shares are available
for future issuance.
14. Earnings Per Share
The following table sets forth the computation of basic and diluted net
income per share:
Year Ended
------------------------------------------------------
December 28, December 29, December 30,
2002 2001 2000
Numerator:
Numerator for basic and diluted net income per
share - net income $142,797 $113,448 $105,663
======================================================
Denominator (in thousands):
Denominator for basic net income per share -
weighted-average common shares 107,774 108,097 100,489
Effect of dilutive securities - employee stock
options (Note 13) 427 350 17
------------------------------------------------------
Denominator for diluted net income per share - 108,201 108,447 100,506
adjusted weighted-average common shares
======================================================
Basic net income per share $ 1.32 $ 1.05 $ 1.05
======================================================
Diluted net income per share $ 1.32 $ 1.05 $ 1.05
======================================================
Options to purchase 472,133 shares of common stock at prices ranging from
$21.67 to $29.79 per share were outstanding during 2002 but were not included in
the computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares and,
therefore, the effect would be antidilutive.
GARMIN LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(In Thousands, Except Share and Per Share Information)
15. Share Repurchase Program
On September 24, 2001, the Board of Directors authorized the Company to
repurchase up to 5,000,000 shares of the Company's common stock through December
31, 2002. Through December 28, 2002, the Company had purchased 595,200 shares at
$9,834.
16. Shareholder Rights Plan
On October 24, 2001, Garmin's Board of Directors adopted a shareholder
rights plan (the "Rights Plan"). Pursuant to the Rights Plan, the Board declared
a dividend of one preferred share purchase right on each outstanding common
share of Garmin to shareholders of record as of November 1, 2001. The rights
trade together with Garmin's common shares. The rights generally will become
exercisable if a person or group acquires or announces an intention to acquire
15% or more of Garmin's outstanding common shares. Each right (other than those
held by the new 15% shareholder) will then be exercisable to purchase preferred
shares of Garmin (or in certain instances other securities of Garmin) having at
that time a market value equal to two times the then current exercise price.
Garmin's Board of Directors may redeem the rights at $0.002 per right at any
time before the rights become exercisable. The rights expire October 31, 2011.
17. Selected Quarterly Information (Unaudited)
Year Ended December 28, 2002
-----------------------------------------------------------------------
Quarter Ending
-----------------------------------------------------------------------
March 30 June 29 September 28 December 28
-----------------------------------------------------------------------
Net sales $100,856 $122,838 $107,756 $133,694
Gross profit 54,492 67,662 59,051 73,851
Net income 26,761 32,146 38,428 45,462
Net income per share 0.25 0.30 0.36 0.41
Year Ended December 29, 2001
-----------------------------------------------------------------------
Quarter Ending
-----------------------------------------------------------------------
March 31 June 30 September 29 December 29
-----------------------------------------------------------------------
Net sales $85,534 $103,634 $86,930 $93,021
Gross profit 45,918 55,050 47,729 49,462
Net income 23,799 36,603 25,001 28,045
Net income per share 0.22 0.34 0.23 0.26
The above quarterly financial data is unaudited, but in the opinion of
management, all adjustments necessary for a fair presentation of the selected
data for these interim periods presented have been included.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company
The Company has incorporated by reference certain information in response
or partial response to the Items under this Part III of this Annual Report on
Form 10-K pursuant to General Instruction G(3) of this Form 10-K and Rule 12b-23
under the Exchange Act. The Company's definitive proxy statement in connection
with its annual meeting of stockholders scheduled for June 6, 2003 (the "Proxy
Statement"), will be filed with the Securities and Exchange Commission no later
than 120 days after December 28, 2002.
(a) Directors of the Company
The information set forth in response to Item 401 of Regulation S-K under
the headings "Proposal 1-Election of Two Directors" and "The Board of Directors"
in the Company's Proxy Statement is hereby incorporated herein by reference in
partial response to this Item 10.
(b) Executive Officers of the Company
The information set forth in response to Item 401 of Regulation S-K under
the heading "Executive Officers and Significant Employees of the Company" in
Part I of this Form 10-K is incorporated herein by reference in partial response
to this Item 10.
(c) Compliance with Section 16(a) of the Exchange Act
The information set forth in response to Item 405 of Regulation S-K under
the heading "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement is hereby incorporated herein by reference in partial
response to this Item 10.
Item 11. Executive Compensation
The information set forth in response to Item 402 of Regulation S-K under
"The Board of Directors - Compensation of Directors" and under "Executive
Compensation Matters" in the Company's Proxy Statement (other than the
"Compensation Committee Report on Executive Compensation" and the "Stock
Performance Graph") is hereby incorporated herein by reference in response to
this Item 11.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters
The information set forth in response to Item 403 of Regulation S-K under
the heading "Stock Ownership of Certain Beneficial Owners and Management" in the
Company's Proxy Statement is hereby incorporated herein by reference in response
to this Item 12.
Equity Compensation Plan Information
The following table gives information as of December 28, 2002 about the
Garmin Common Shares that may be issued under all of the Company's existing
equity compensation plans.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters (Continued)
- ------------------------------ ------------------------------ ------------------------- ----------------------------
A B C
- ------------------------------ ------------------------------ ------------------------- ----------------------------
Number of securities
remaining available for
Plan Category Number of securities to be Weighted-average future issuance under
issued upon exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column A)
- ------------------------------ ------------------------------ ------------------------- ----------------------------
Equity compensation plans
approved by shareholders(1) 1,873,843 (2) $19.06 1,545,688 (3)
- ------------------------------ ------------------------------ ------------------------- ----------------------------
Equity compensation plans
not approved by shareholders -- -- --
- ------------------------------ ------------------------------ ------------------------- ----------------------------
Total 1,873,843 $19.06 1,545,688
- ------------------------------ ------------------------------ ------------------------- ----------------------------
(1) Consists of the Garmin Ltd. 2000 Equity Incentive Plan.
(2) Excludes purchase rights accruing under the Company's Employee Stock
Purchase Plan which has a shareholder approved reserve of 1,000,000
shares. Under this plan, employees of the Company and its subsidiaries
may purchase Garmin Common Shares at annual intervals at a purchase
price equal to 85% of the lower of (a) the market price of Garmin
Common Shares on the commencement date of each offering period or (b)
the market price of Garmin Common Shares on the termination date of
each offering period.
(3) Excludes shares available for issuance under the Garmin Ltd. Employee
Stock Purchase Plan. As of December 28, 2002, an aggregate of 806,958
shares were available for issuance under the Garmin Ltd. Employee Stock
Purchase Plan.
The Company has no knowledge of any arrangement, the operation of which
may at a subsequent date result in a change in control of the Company.
Item 13. Certain Relationships and Related Transactions
The information set forth in response to Item 404 of Regulation S-K under
the heading "The Board of Directors - Compensation Committee Interlocks and
Insider Participation" and "Certain Relationships and Related Transactions" in
the Company's Proxy Statement is incorporated herein by reference in response to
this Item 13.
Item 14. Controls and Procedures
During the 90-day period prior to the filing date of this report,
management, including the Company's Chief Executive Officer and Chief Financial
Officer, reviewed and evaluated the effectiveness of the design and operation of
the Company's disclosure controls and procedures. Based upon, and as of the date
of that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's current disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports the
Company files and submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported as and when required and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
There have been no significant changes in the Company's internal controls
or in other factors which could significantly affect internal controls
subsequent to the date the Company carried out its evaluation. There were no
significant deficiencies or material weaknesses identified in the evaluation
and, therefore, no corrective actions were taken.
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) List of Documents filed as part of this Report
(1) Consolidated Financial Statements
The consolidated financial statements and related notes, together with the
report of Ernst & Young LLP, appear in Part II, Item 8 "Financial
Statements and Supplementary Data" of this Form 10-K.
(2) Schedule II Valuation and Qualifying Accounts
All other schedules have been omitted because they are not applicable, are
insignificant or the required information is shown in the consolidated
financial statements or notes thereto.
(3) Exhibits -- The following exhibits are filed as part of, or incorporated by
reference into, this Annual Report on Form 10-K:
EXHIBIT DESCRIPTION
NUMBER
-------- -------------
3.1* Memorandum of Association
3.2* Articles of Association
4.1* Specimen share certificate
4.2** Shareholder Rights Agreement
10.1* Garmin Ltd. 2000 Equity Incentive Plan
10.2* Garmin Ltd. 2000 Non-Employee Directors' Option Plan
10.3* Garmin Ltd. Employee Stock Purchase Plan
10.4*** First Amendment to Garmin Ltd. Employee Stock
Purchase Plan
21.1*** List of subsidiaries
23.1 Consent of Ernst & Young LLP
24.1 Power of Attorney (included in signature page)
99.1 Chief Executive Officer's Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer's Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
- -------------------------------------------------------------------------------
* Incorporated by reference from the Registrant's Registration Statement on Form
S-1 filed December 6, 2000 and declared effective on December 8, 2000
(Commission File No. 333-45514).
** Incorporated by reference from the Registrant's Current Report on Form 8-K
filed on October 26, 2001.
*** Incorporated by reference from the Registrant's Annual Report on Form 10-K
filed on March 27, 2002.
(b) Reports on Form 8-K
The Company furnished under Item 9 of Form 8-K, the Company's Form 8-K
dated October 30, 2002 reporting the announcement of financial results for the
fiscal quarter ended September 28, 2002.
The Company furnished under Item 9 of Form 8-K, the Company's Form 8-K
dated December 16, 2002 reporting the revision of guidance upward for the fourth
quarter and the announcement of production and facility expansions.
GARMIN LTD. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULE
Garmin Ltd. Financial Statement Schedule for the years ended December 28, 2002,
December 29, 2001 and December 30, 2000.
Schedule II - Valuation and qualifying accounts... ........................67
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Garmin Ltd. and Subsidiaries
Additions
-----------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 30, 2000:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,116 $ 911 $ - $ (161)(1) $ 1,866
Inventory reserve 1,727 5,915 - (1,138)(2) 6,504
-------------------------------------------------------------------------
Total $ 2,843 $ 6,826 $ - $(1,299) $ 8,370
=========================================================================
Year Ended December 29, 2001:
Deducted from asset accounts:
Allowance for doubtful accounts $ 1,866 $ 1,137 $ - $ (376)(1) $ 2,627
Inventory reserve 6,504 4,000 - (950)(2) 9,554
-------------------------------------------------------------------------
Total $ 8,370 $ 5,137 $ - $(1,326) $ 12,181
=========================================================================
Year Ended December 28, 2002:
Deducted from asset accounts:
Allowance for doubtful accounts $ 2,627 $ 941 $ - $ (415)(1) $ 3,153
Inventory reserve 9,554 688 (818)(2) 9,424
-------------------------------------------------------------------------
Total $ 12,181 $ 1,629 $ - $(1,233) $ 12,577
=========================================================================
(1) Uncollectible accounts written off, net of recoveries.
(2) Obsolete inventory dispositions and shrinkage.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GARMIN LTD.
By /s/ Min H. Kao
Min H. Kao
Chief Executive Officer
Dated: March 25, 2003
POWER OF ATTORNEY
Know all persons by these presents, that each person whose signature
appears below constitutes and appoints Gary L. Burrell and Min H. Kao and Andrew
R. Etkind, and each of them, as his or her attorney-in-fact, with the power of
substitution, for him or her in any and all capacities, to sign any amendments
to this Annual Report on Form 10-K, and to file the same, with exhibits thereto
and other documents in connection therewith, with the Securities and Exchange
Commission, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on March 25, 2003:
/s/ Min H. Kao /s/ Gene M. Betts
-------------- -----------------
Min H. Kao Gene M. Betts
Co-Chairman, Chief Director
Executive Officer and Director
(Principal Executive Officer)
/s/ Kevin Rauckman /s/Donald H. Eller
------------------ ------------------
Kevin Rauckman Donald H. Eller
Chief Financial Officer and Treasurer Director
(Principal Financial Officer and
Principal Accounting Officer)
/s/ Gary L. Burrell /s/ Thomas A. McDonnell
------------------- -----------------------
Gary L. Burrell Thomas A. McDonnell
Co-Chairman and Director Director
Certification
I, Min H. Kao, certify that:
1. I have reviewed this annual report on Form 10-K of Garmin Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 By /s/ Min H. Kao
Min H. Kao
Co-Chairman and Chief
Executive Officer
Certification
I, Kevin Rauckman, certify that:
1. I have reviewed this annual report on Form 10-K of Garmin Ltd.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;.
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 25, 2003 By /s/ Kevin Rauckman
Kevin Rauckman
Chief Financial Officer
Garmin Ltd.
2001 Form 10-K Annual Report
Exhibit Index
The following exhibits are attached hereto. See Part IV of this Annual
Report on Form 10-K for a complete list of exhibits.
Exhibit
Number Document
- ------ --------
23.1 Consent of Ernst & Young LLP
99.1 Chief Executive Officer's Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Chief Financial Officer's Certification pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-51470 and 333-52766) pertaining to the Garmin Ltd. Employee
Stock Purchase Plan, Garmin Ltd. 2000 Equity Incentive Plan, Garmin Ltd.
Non-Employee Director Option Plan, and the Garmin International, Inc. Savings
and Profit Sharing Plan of our report dated January 31, 2003, with respect to
the consolidated financial statements and schedule of Garmin Ltd. included in
the Annual Report (Form 10-K) for the year ended December 28, 2002.
/s/ Ernst & Young LLP
Kansas City, Missouri
March 25, 2003
EXHIBIT 99.1
Certification
Pursuant to Section 906 of the sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Min H.
Kao, Co-Chairman and Chief Executive Officer of Garmin Ltd. (the "Company")
hereby certify that:
(1) The Annual Report on Form 10-K for the year ended December 28,
2002 (the "Form 10-K") of the Company fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2) the information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Dated: March 25, 2003 /s/ Min H. Kao
Min H. Kao
Co-Chairman and Chief Executive Officer
This certification accompanies the Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
EXHIBIT 99.2
Certification
Pursuant to Section 906 of the sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of
Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a)
and (b) of Section 1350, Chapter 63 of Title 18, United States Code), I, Min H.
Kao, Co-Chairman and Chief Executive Officer of Garmin Ltd. (the "Company")
hereby certify that:
(1) The Annual Report on Form 10-K for the year ended December 28, 2002
(the "Form 10-K") of the Company fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Form 10-K fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: March 25, 2003 /s/ Kevin Rauckman
Kevin Rauckman
Chief Financial Officer
This certification accompanies the Form 10-K pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.