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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 2003
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
No Changes
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the Company (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Company was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [x] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [x] NO [ ]
Number of shares outstanding of the Company's common shares as of May 9, 2003:
Common Shares, $.01 par value - 107,990,527
Garmin Ltd.
Form 10-Q
Quarter Ended March 29, 2003
Table of Contents
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements
(unaudited)
Introductory Comments 3
Condensed Consolidated Balance Sheets at March
29, 2003 and December 28, 2002 4
Condensed Consolidated Statements of Income for the
13-weeks ended March 29, 2003 and March 30, 2002 5
Condensed Consolidated Statements of Cash Flows for the
13-weeks ended March 29, 2003 and March 30, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 18
Item 4. Controls and procedures 19
Part II - Other Information
Item 1. Legal Proceedings 20
Item 2. Changes in Securities 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of
Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature Page 21
Certification of Chief Executive Officer 22
Certification of Chief Financial Officer 23
Index to Exhibits 24
Garmin Ltd.
Form 10-Q
Quarter Ended March 29, 2003
Part I - Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Introductory Comments
The Condensed Consolidated Financial Statements of Garmin Ltd. ("Garmin" or
the "Company") included herein have been prepared by the Company, without audit,
pursuant to the rules and regulations of the United States Securities and
Exchange Commission. Certain information and note disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States have been condensed or omitted pursuant
to such rules and regulations, although the Company believes that the
disclosures are adequate to enable a reasonable understanding of the information
presented. These Condensed Consolidated Financial Statements should be read in
conjunction with the audited financial statements and the notes thereto for the
year ended December 28, 2002. Additionally, the Condensed Consolidated Financial
Statements should be read in conjunction with Item 2 of Management's Discussion
and Analysis of Financial Condition and Results of Operations included in this
Form 10-Q.
The results of operations for the 13-week period ended March 29, 2003 are
not necessarily indicative of the results to be expected for the full year 2003.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
--------------------------------------
(Unaudited)
March 29, December 28,
2003 2002
--------------------------------------
Assets
Current assets:
Cash and cash equivalents $251,148 $216,768
Marketable securities 79,311 113,336
Accounts receivable, net 52,108 58,278
Inventories 62,846 57,507
Deferred income taxes 14,847 14,847
Prepaid expenses and other current assets 5,649 4,490
---------------- ----------------
Total current assets 465,909 465,226
Property and equipment, net 76,785 74,440
Marketable securities 170,008 132,372
Restricted cash 1,599 1,598
Other assets, net 24,598 24,479
---------------- ----------------
Total assets $738,899 $698,115
================ ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $24,670 $32,446
Salaries and benfits payable 2,867 4,178
Warranty reserve 5,705 5,949
Other accrued expenses 10,989 12,752
Income taxes payable 26,597 18,080
---------------- ----------------
Total current liabilities 70,828 73,405
Long-term debt, less current portion 20,000 20,000
Deferred income taxes 2,278 2,211
Stockholders' equity:
Preferred stock, $1.00 par value, 1,000,000 authorized, 0 0
none issued
Common stock, $0.01 par value, 500,000,000, share authorized:
Issued and outstanding shares - 107,919,766 as of 1,080 1,080
December 28, 2002 and 107,965,477 as of
March 29, 2003
Additional paid-in capital 130,112 129,431
Retained earnings 549,378 507,884
Accumulated other comprehensive loss (34,777) (35,896)
---------------- ----------------
Total stockholders' equity 645,793 602,499
---------------- ----------------
Total liabilities and stockholders' equity $738,899 $698,115
================ ================
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
13-Weeks Ended
-------------------------------------
March 29, March 30,
2003 2002
-------------------------------------
Net sales $123,788 $100,856
Cost of goods sold 49,133 46,364
--------------- ---------------
Gross profit 74,655 54,492
Selling, general and
administrative expenses 13,593 11,239
Research and development
expense 8,796 7,973
--------------- ---------------
22,389 19,212
--------------- ---------------
Operating income 52,266 35,280
Other income (expense):
Interest income 1,922 1,625
Interest expense (274) (371)
Foreign currency (777) (733)
Other (41) 71
--------------- ---------------
830 592
--------------- ---------------
Income before income taxes 53,096 35,872
Income tax provision 11,602 9,111
--------------- ---------------
Net income $41,494 $26,761
=============== ===============
Net income per share:
Basic $0.38 $0.25
Diluted $0.38 $0.25
Weighted average common
shares outstanding:
Basic 107,948 107,777
Diluted 108,693 108,137
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13-Weeks Ended
-------------------------------------------
March 29, March 30,
2003 2002
-------------------------------------------
Operating Activities:
Net income $41,494 $26,761
Depreciation and amortization 4,542 2,929
Gain on sale of property and equipment 65 0
Provision for doubtful accounts 190 845
Deferred income taxes 0 201
Provision for obsolete inventory 0 454
Foreign currency transaction gains 729 495
Changes in operating assets and liabilities:
Accounts receivable 4,465 (1,021)
Inventories (5,261) 7,077
Other current assets (1,160) (737)
Accounts payable (7,875) 303
Other current liabilities (3,336) 4,175
Income taxes 8,511 6,844
------------------ ------------------
Net cash provided by operating activities 42,364 48,326
Investing activities:
Purchases of property and equipment (4,648) (3,643)
Purchase of intangible assets (289) 0
Purchase of marketable securities, net (4,258) (8,949)
Proceeds from asset sale 10 0
Other 0 (382)
------------------ ------------------
Net cash used in investing activities (9,185) (12,974)
Financing activities:
Payments on long term debt 0 (2,851)
Proceeds from issuance of common stock 685 0
------------------ ------------------
Net cash provided by (used in) financing activities 685 (2,851)
Effect of exchange rate changes on cash 516 536
------------------ ------------------
Net increase in cash 34,380 33,037
Cash and cash equivalents at beginning of period 216,768 192,842
------------------ ------------------
Cash and cash equivalents at end of period $251,148 $225,879
================== ==================
See accompanying notes.
Garmin Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 29, 2003
(In thousands, except share and per share information)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the 13-week period ended March 29, 2003 are
not necessarily indicative of the results that may be expected for the year
ended December 27, 2003.
The condensed consolidated balance sheet at December 28, 2002 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for completed financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 28, 2002.
The Company's fiscal year is based on a 52-53 week period ending on the last
Saturday of the calendar year. Therefore the financial results of certain fiscal
years, and the associated 14-week quarters, will not be exactly comparable to
the prior and subsequent 52-week fiscal years and the associated quarters having
only 13 weeks. The quarters ended March 29, 2003 and March 30, 2002 both contain
operating results for 13 weeks.
2. Recent 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 adoption of this statement did not 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 footnotes 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
requires 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 were 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 did not
have a material impact on the Company's results of operations or financial
condition. (See Note 9.)
3. Inventories
The components of inventory consist of the following:
March 29, December 28,
2003 2002
-----------------------------------------
Raw materials $23,909 $24,177
Work-in-process 13,259 10,936
Finished goods 35,325 31,818
Inventory reserves (9,647) (9,424)
-----------------------------------------
Inventory, net of reserves $62,846 $57,507
=========================================
4. Stock Repurchase Plan
There is no stock repurchase program in place as of March 29, 2003. The previous
stock repurchase program established on September 24, 2001 expired on December
31, 2002. The Company purchased 595,000 shares during the life of that program
for $9,834.
5. Long Term Debt
During 2000, Garmin International Inc. entered into an 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. At March 29, 2003, outstanding principal under the
2000 Bonds totaled $20,000. Interest on the 2000 Bonds is payable monthly at a
variable interest rate (1.37% at March 28, 2003), 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. The Company has the option
at any time to retire a portion or all of its long-term debt.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted net income
per share (in thousands, except per share information):
13-Weeks Ended
---------------------------------
March 29, March 30,
2003 2002
---------------------------------
Numerator:
Numerator for basic and diluted net income
per share - net income $41,494 $26,761
=================================
Denominator:
Denominator for basic net income per share - 107,948 107,777
weighted-average common shares
Effect of dilutive securities -
employee stock options 745 360
---------------------------------
Denominator for diluted net income per share -
adjusted weighted-average common shares
108,693 108,137
=================================
Basic net income per share $0.38 $0.25
=================================
Diluted net income per share $0.38 $0.25
=================================
At March 29, 2003, all options to purchase the shares of common stock were
included in the computation of diluted earnings per share because the options
exercise price was in all cases less than the average market price of the common
shares. Therefore, there was no anti-dilutive effect of these options during the
13-week period ended March 29, 2003.
7. Comprehensive Income
Comprehensive income is comprised of the following:
13-Weeks Ended
-------------------------------
March 29, March 30,
2003 2002
-------------------------------
Net income $41,494 $26,761
Translation adjustment 1,015 962
Change in fair value of effective portion of
cash flow hedges, net of deferred taxes - (37)
Change in fair value of available-for-sale
marketable securities 104 -
-------------------------------
Comprehensive income $42,613 $27,686
===============================
8. Segment Information
Revenues and income before income taxes for each of the Company's reportable
segments are presented below:
13-Weeks Ended
---------------------------------------------------------------
March 29, 2003 March 30, 2002
---------------------------------------------------------------
Consumer Aviation Consumer Aviation
(in thousands)
Sales to external customers $95,309 $28,479 $74,747 $26,109
Income before income taxes $40,168 $12,928 $25,149 $10,723
---------------------------------------------------------------
Revenues and long-lived assets (property and equipment) by geographic area are
as follows for the 13-week periods ended March 29, 2003 and March 30, 2002:
North
America Asia Europe Total
--------------------------------------------------------------------
March 29, 2003
Sales to external customers $85,252 $5,010 $33,526 $123,788
Long-lived assets 43,636 32,634 515 76,785
March 30, 2002
Sales to external customers $73,011 $4,139 $23,706 $100,856
Long-lived assets 40,602 30,970 534 72,106
9. Stock Compensation Plans
Accounting for Stock-Based Compensation
At March 29, 2003, the company has two stock-based employee compensation
plans. 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.
-------------------------------------
March 29, March 30,
2003 2002
-------------------------------------
Net income as reported $41,494 $26,761
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards,
net of tax effects (745) (543)
-------------------------------------
Pro forma net income $40,749 $26,218
=====================================
Net income per share as reported:
Basic $0.38 $0.25
Diluted $0.38 $0.25
Pro forma net income per share:
Basic $0.38 $0.24
Diluted $0.37 $0.24
2000 Non-employee Directors' Option Plan
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.
2000 Equity Incentive Plan
Also in October 2000, the stockholders adopted an equity incentive plan
(the Plan) providing for grants of incentive and nonqualified stock options and
'other' stock compensation awards to employees of the Company and its
subsidiaries, pursuant to which up to 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. A summary of the Company's stock option activity and related information
under the 2000 Equity Incentive Plan and 2000 Non-employee Directors' Option
Plan for the period ending March 29, 2003 and years ended December 28, 2002 and
December 29, 2001 is provided below:
Weighted-Average
Exercise Price Number of Shares
----------------------------------------------------
(In Thousands)
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
Granted - 0
Exercised $14.95 (45)
Canceled $15.93 (8)
----------------------
Outstanding at March 29, 2003 $19.17 1,821
There were no options granted during the 13-week periods ending March 29,
2003 and March 30, 2002.
The weighted-average remaining contract life for options outstanding at
March 29, 2003 is approximately 8.4 years. Options outstanding at March 29, 2003
have exercise prices ranging from $14.00 to $29.79. At March 29, 2003, options
to purchase 397,361 shares are exercisable.
10. Warranty Reserves
The Company's products sold are generally covered by a warranty for periods
ranging from one to two years. The Company's estimate of costs to service its
warranty obligations are based on historical experience and expectation of
future conditions and are recorded as a liability on the balance sheet. The
following reconciliation provides an illustration of changes in the aggregate
warranty reserve.
March 29 March 30
2003 2002
________ ________
Balance - beiginning of the period $ 5,949 $ 3,914
Accrual for products sold
during the period 1,886 1,797
Expenditures (2,130) (1,603)
________ _________
Balance - end of the period $ 5,705 $ 4,108
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The discussion set forth below, as well as other portions of this Quarterly
Report, contains statements concerning potential future events. Such
forward-looking statements are based upon assumptions by our management, as of
the date of this Quarterly Report, including assumptions about risks and
uncertainties faced by the Company. Readers can identify these forward-looking
statements by their use of such verbs as expects, anticipates, believes or
similar verbs or conjugations of such verbs. If any of our assumptions prove
incorrect or should unanticipated circumstances arise, our actual results could
materially differ from those anticipated by such forward-looking statements. The
differences could be caused by a number of factors or combination of factors
including, but not limited to, those factors identified in the Company's Annual
Report on Form 10-K for the year ended December 28, 2002. This report has been
filed with the Securities and Exchange Commission (the "SEC" or the
"Commission") in Washington, D.C. and can be obtained by contacting the SEC's
public reference operations or obtaining it through the SEC's web site on the
World Wide Web at http://www.sec.gov. Readers are strongly encouraged to
consider those factors when evaluating any forward-looking statement concerning
the Company. The Company will not update any forward-looking statements in this
Quarterly Report to reflect future events or developments.
The information contained in this Management's Discussion and Analysis of
Financial Condition and Results of Operations should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes thereto included in
this Form 10-Q and the audited financial statements and notes thereto in the
Company's Annual Report on Form 10-K for the year ended December 28, 2002.
The Company is a leading worldwide provider of navigation, communications
and information devices, most of which are enabled by Global Positioning System,
or GPS, technology. We operate in 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 use 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.
Results of Operations
The following table sets forth our results of operations as a percentage of
net sales during the periods shown:
13-Weeks Ended
-------------------------------------
March 29, 2003 March 30, 2002
-------------------------------------
Net sales 100.0% 100.0%
Cost of goods sold 39.7% 46.0%
----------- ------------
Gross Profit 60.3% 54.0%
Selling, general and administrative 11.0% 11.1%
Research and development 7.1% 7.9%
----------- ------------
Total expenses 18.1% 19.0%
----------- ------------
Operating income 42.2% 35.0%
Other income, net 0.7% 0.6%
----------- ------------
Income before income taxes 42.9% 35.6%
Provision for income taxes 9.4% 9.1%
----------- ------------
Net income 33.5% 26.5%
=========== ============
The following table sets forth our results of operations for each of our
two segments through income before income 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 condensed consolidated statements of income
included in Item 1.
13-Weeks Ended
-------------------------------------------------------
-------------------------------------------------------
Consumer Aviation Consumer Aviation
________ ________ ________ ________
Net sales $95,309 $28,479 $74,747 $26,109
Cost of goods sold 39,567 9,566 36,080 10,284
---------- ---------- ----------- ----------
Gross Profit 55,742 18,913 38,667 15,825
Operating Expenses:
Selling, general and administrative 10,687 2,906 8,899 2,340
Research and development 5,549 3,247 4,975 2,998
---------- ---------- ----------- ----------
Total Expenses 16,236 6,153 13,874 5,338
---------- ---------- ----------- ----------
Operating income 39,506 12,760 24,793 10,487
Other income, net 662 168 357 235
---------- ---------- ----------- ----------
Income before income taxes $40,168 $12,928 $25,150 $10,722
Comparison of 13-Weeks Ended March 29, 2003 and March 30, 2002
Net Sales
Net sales increased $22.9 million, or 22.7%, to $123.8 million for the
13-week period ended March 29, 2003, from $100.9 million for the 13-week period
ended March 30, 2002. The increase for the 13-week period ended March 29, 2003
was primarily due to the success of the 22 new products that were introduced
during fiscal year 2002 and overall demand for our consumer products associated
with a strong marine and recreation selling season during the quarter. Sales
from our consumer products accounted for 77% of net sales for the first quarter
of 2003 compared to 74% during the first quarter of 2002. Sales from our
aviation products accounted for 23% for the first quarter of 2003 compared to
26% during the first quarter of 2002. Total consumer and aviation units
increased 43% to 446,000 in 2003 from 313,028 in 2002. The higher unit volume in
the first quarter of fiscal 2003 was primarily attributable to the introduction
of new products in 2002 which caused higher volume in our consumer segment.
Net sales for the consumer segment increased $20.5 million, or 27.4%, to
$95.3 million for the 13-week period ended March 29, 2003, from $74.8 million
for the 13-week period ended March 30, 2002. The increase for the 13-week period
ended March 29, 2003 was primarily due to the success of the new consumer
products introduced during fiscal year 2002 and overall demand for our consumer
products associated with a strong marine and recreation selling season during
the quarter.
Net sales for the aviation segment increased $2.4 million, or 9.1%, to
$28.5 million for the 13-week period ended March 29, 2003, from $26.1 million
for the 13-week period ended March 30, 2002. The increase for the 13-week period
ended March 29, 2003 was primarily due to demand for new products such as the
GTX 330, GDL 49, and GPSMAP 196.
Gross Profit
Gross profit increased $20.2 million, or 37.0%, to $74.7 million for the
13-week period ended March 29, 2003, from $54.5 million for the 13-week period
ended March 30, 2002. Increased demand for our products resulted in increased
production volumes at our Taiwan factory, resulting in improved manufacturing
efficiencies and reduced factory overhead. In addition, reduced raw material
component costs, coupled with our vertical integration strategy, resulted in
significant gross margin improvement during the quarter. The increase in gross
profit is also attributable to a favorable product mix during the quarter. Gross
profit as a percentage of net sales increased to 60.3% for the 13-week period
ended March 29, 2003 compared to 54.0% for the 13-week period ended March 30,
2002.
Gross profit for the consumer segment increased $17.0 million, or 44.2%, to
$55.7 million for the 13-week period ended March 29, 2003, from $38.7 million
for the 13-week period ended March 30, 2002. This increase is primarily
attributable to the increase in consumer revenue, improved manufacturing
efficiencies on many of our new products introduced during fiscal year 2002, and
a reduction of raw material costs. The increase in gross profit is also
attributable to a favorable product mix during the quarter. Gross profit as a
percentage of net sales increased to 58.5% during the 13-week period ended March
29, 2003 compared to 51.7% for the 13-week period ended March 30, 2002.
Gross profit for the aviation segment increased $3.1 million, or 19.5%, to
$18.9 million for the 13-week period ended March 29, 2003, from $15.8 million
for the 13-week period ended March 30, 2002. This increase is associated with
the increase in revenues in our aviation segment during the quarter. Gross
profit as a percentage of net sales increased to 66.4% for the 13-week period
ended March 29, 2003 from 60.6% for the 13-week period ended March 30, 2002.
This increase as a percentage of net sales was primarily attributed to product
mix as we experienced an increase in higher margin panel mount unit sales during
2003 when compared to 2002.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.4 million, or
21.0%, to $13.6 million (11.0% of net sales) for the 13-week period ended March
29, 2003, from $11.2 million (11.1% of net sales) for the 13-week period ended
March 30, 2002. Selling, general and administrative expenses increased $1.8
million, or 20.1%, in the consumer segment and increased $0.6 million, or 24.2%,
in the aviation segment. The increase in expense was driven primarily by
increased call center expenses ($0.4 million), insurance premiums ($0.4
million), and ORACLE ERP implementation costs ($0.9 million).
Research and Development Expense
Research and development expenses increased $0.8 million, or 10.3%, to $8.8
million (7.1% of net sales) for the 13-week period ended March 29, 2003, from
$8.0 million (7.9% of net sales) for the 13-week period ended March 30, 2002.
Research and development expenses increased $0.6 million, or 11.5%, in the
consumer segment and $0.3 million, or 8.3%, in the aviation segment. The
increase in expense was due to ongoing development activities for new products
within our consumer segment during the quarter, and the addition of 73 new
engineering personnel to our staff in both the consumer and aviation segments
within the last 12 months as a result of our continued emphasis on product
innovation.
Operating Income
Operating income for the 13-week period ended March 29, 2003 increased to
$52.3 million from $35.3 million for the 13-week period ended March 30, 2002.
Operating income as a percentage of net sales increased to 42.2% for the 13-week
period ended March 29, 2003, from 35.0% for the 13-week period ended March 30,
2002, due to the significant improvement in gross profit partially offset by
overall increases in operating expenses.
Other Income (Expense)
Other income (expense) principally consists of interest income, interest
expense and foreign currency exchange gains and losses. Other income for the
13-week period ended March 29, 2003 amounted to $0.8 million compared to other
income of $0.6 million for the 13-week period ended March 30, 2002. Interest
income for the 13-week period ended March 29, 2003 amounted to $1.9 million
compared to $1.6 million for the 13-week period ended March 30, 2002, the
increase being attributable to an increase in cash balances during the last 12
months. The average taxable equivalent interest rate return on invested cash
during the quarter was 1.6% compared to 2.2% during fiscal year 2002. Interest
expense decreased to $0.3 million for the 13-week period ended March 29, 2003
from $0.4 million for the 13-week period ended March 30, 2002.
We recognized a foreign currency exchange loss of $0.8 million for the
13-week period ended March 29, 2003 compared to a loss of $0.7 million for the
13-week period ended March 30, 2002. The $0.8 million loss was due to the
weakness of the U.S. Dollar compared to the Taiwan Dollar during the first
quarter of fiscal 2002, when the exchange rate decreased to 34.79 TD/USD at
March 29, 2003 from 34.90 TD/USD at December 28, 2002. The $0.7 million loss was
due to the weakness of the U.S. Dollar compared to the Taiwan Dollar during the
first quarter of fiscal 2002, when the exchange rate decreased to 35.00 TD/USD
at March 30, 2002 from 35.17 TD/USD at December 30, 2001.
Income Tax Provision
Income tax expense increased by $2.5 million, to $11.6 million, for the
13-week period ended March 29, 2003 from $9.1 million for the 13-week period
ended March 30, 2002 due to our higher taxable income. The effective tax rate
fell to 21.9% due to additional tax benefits granted by the Taiwan government
from increased production in our Taiwan facility.
Net Income
As a result of the above, net income increased 55.1% for the 13-week period
ended March 29, 2003 to $41.5 million compared to $26.8 million for the 13-week
period ended March 30, 2002.
Liquidity and Capital Resources
Net cash generated by operating activities was $42.4 million for the
13-week period ended March 29, 2003 compared to $48.3 million for the 13-week
period ended March 30, 2002. 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 adequate 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 experienced a $5.3 million increase in
inventory at March 29, 2003 when compared to fiscal year-end December 28, 2002.
Inventory levels were increased to support the anticipated seasonal increase in
demand for our products during the upcoming second quarter 2003 selling season.
Cash flow from investing activities during the 13-week period ending March
29, 2003 was a $9.2 million use of cash. Cash flow used in investing activities
principally relates to $4.6 million in capital expenditures and the net purchase
of $4.3 million of fixed income securities associated with the investment of our
on-hand cash balances. 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 taxable equivalent
return on its investments during the quarter was approximately 1.6%.
Cash flow from financing activities during the period was a $0.7 million
source of cash, which represents proceeds from the issuance of common stock
related to our Company stock option plan.
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.
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 April 25, 2003, Garmin International, Inc. signed an agreement with Turner
Construction Company engaging Turner as the construction manager on a future
facility expansion in Olathe, Kansas. The estimated cost of completion on this
expansion project is approximately $60.0 million with estimated completion of
September 2004.
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 March 29, 2003, outstanding principal under the
2000 Bonds totaled $20.0 million. Interest on the 2000 Bonds is payable monthly
at a variable interest rate (1.37% at March 29, 2003), 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.
The reimbursement agreement 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 agreement.
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.
Item 3. 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
material 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 material 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. 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 Taiwan Dollar. Garmin Corporation,
located in Shijr, Taiwan uses the local currency as its 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 operations, we
have elected to retain most of our cash at our Taiwan subsidiary in U.S.
dollars. As discussed above, the exchange rate decreased 0.3% during 2003 and
resulted in a foreign currency loss of $0.8 million. If the exchange rate
increased by a similar percentage, a comparable foreign currency gain would be
recognized.
Interest Rate Risk
As of March 29, 2003, 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 $0.6 million is the amount we would be required to pay to
terminate the swap agreements at March 29, 2003. 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
$0.5 million (positive 10% change) or $0.7 million (negative 10% change),
respectively.
The Company' average outstanding debt during the 13-week period ended
March 29, 2003 was approximately $20.0 million. The average interest rate on
debt during the quarter was approximately 1.37%. A 10% positive or negative
change in the average interest rate during the quarter would have resulted in
interest expense of $0.25 million (positive 10% change) or $0.30 million
(negative 10% change), respectively. This compares to the actual interest
expense of $0.27 million during fiscal 2003.
Item 4. Controls and Procedures
Within 90 days prior to the filing date of this report, the Company's Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of the
design and operation of the Company's disclosure controls and procedures and,
based upon this evaluation, have concluded that the disclosure controls and
procedures are effective.
There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these internal controls
subsequent to the completion of their evaluation.
Part II - Other Information
Item 1. Legal Proceedings
-----------------------------------------
From time to time the Company may be involved in litigation arising
in the course of its operations. As of May 14, 2003, the Company
was not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None
Item 3. Defaults Upon Senior Securities
-----------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------
None
Item 5. Other Information
-----------------------------------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------
a. Exhibits
Exhibit 99.1 Certification of Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002(filed
herewith)
b. Reports on Form 8-K
The Company furnished under Item 9 of Form 8-K the Company's Form
8-K dated February 12, 2003 reporting the announcement of
financial results for the fiscal quarter and year ended December
28, 2002.
SIGNATURES
Pursuant to the requirements 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/ Kevin Rauckman
Kevin Rauckman
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Dated: May 14, 2003
Certification
I, Min H. Kao, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Garmin Ltd.;
2. Based on my knowledge, this quarterly 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 quarterly
report;.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 14, 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 quarterly report on Form 10-Q of Garmin Ltd.;
2. Based on my knowledge, this quarterly 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 quarterly
report;.
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly 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 we 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 quarterly 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
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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 function):
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
quarterly report whether or not 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: May 14, 2003 By /s/ Kevin Rauckman
Kevin Rauckman
Chief Financial Officer
INDEX TO EXHIBITS
Exhibit 99.1 Certification of Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
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), each of
the undersigned officers of Garmin Ltd. (the "Company") does hereby certify
that:
(1) The Quarterly Report on Form 10-Q for the quarter ended March 29, 2003
(the "Form 10-Q") 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-Q fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
Dated: May 14, 2003 /s/ Min H. Kao________________________
Min H. Kao
Co-Chairman and Chief Executive Officer
Dated: May 14, 2003 /s/ Kevin Rauckman____________________
Kevin Rauckman
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to Garmin Ltd. and will be retained by Garmin Ltd. and furnished to the
Securities and Exchange Commission or its staff upon request.
This certification accompanies the Form 10-Q 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.