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 26, 2005
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 Stree (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 April 29, 2005
Common Shares, $.01 par value: 108,432,680
1
Garmin Ltd.
Form 10-Q
Quarter Ended March 26, 2005
Table of Contents
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements (Unaudited) 3
Introductory Comments 3
Condensed Consolidated Balance Sheets at March 26, 2005
and December 25, 2004 4
Condensed Consolidated Statements of Income for the
13-weeks ended March 26, 2005 and March 27, 2004 5
Condensed Consolidated Statements of Cash Flows for the
13-weeks ended March 26, 2005 and March 27, 2004 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. Unregistered Sales of Equity Securities and Use
of Proceeds 20
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 5. Other Information 20
Item 6. Exhibits 21
Signature Page 22
Index to Exhibits 23
2
Garmin Ltd.
Form 10-Q
Quarter Ended March 26, 2005
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 U.S. generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are adequate to
enable a reasonable understanding of the information presented. These Condensed
Consolidated Financial Statements should be read in conjunction with the audited
financial statements and the notes thereto for the year ended December 25, 2004.
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 26, 2005 are
not necessarily indicative of the results to be expected for the full year 2005.
3
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
-----------------------------------
(Unaudited)
March 26, December 25,
2005 2004
Assets
Current assets:
Cash and cash equivalents $249,193 $249,909
Marketable securities 52,270 64,367
Accounts receivable, net 101,720 110,119
Inventories 166,429 154,980
Deferred income taxes 36,962 38,527
Prepaid expenses and other current assets 16,991 19,069
--------------- ----------------
Total current assets 623,565 636,971
Property and equipment, net 180,342 171,630
Marketable securities 299,850 257,848
Restricted cash 1,482 1,457
Other assets, net 47,992 49,485
--------------- ----------------
Total assets $1,153,231 $1,117,391
=============== ================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $40,321 $53,673
Salaries and benefits payable 7,681 7,183
Warranty reserve 14,778 15,518
Other accrued expenses 18,795 28,960
Income taxes payable 65,975 70,933
--------------- ----------------
Total current liabilities 147,550 176,267
Deferred income taxes 5,334 5,267
Stockholders' equity:
Common stock, $0.01 par value, 500,000,000 shares authorized:
Issued and outstanding shares - 108,327,000 as of
December 25, 2004 and 108,429,044 as of
March 26, 2005 1,085 1,084
Additional paid-in capital 110,853 108,949
Retained earnings 862,610 815,209
Accumulated other comprehensive gain 25,799 10,615
--------------- ----------------
Total stockholders' equity 1,000,347 935,857
--------------- ----------------
Total liabilities and stockholders' equity $1,153,231 $1,117,391
=============== ================
See accompanying notes.
4
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
13-Weeks Ended
--------------------------------------
March 26, March 27,
2005 2004
--------------------------------------
Net sales $192,651 $158,329
Cost of goods sold 89,453 77,878
--------------- ----------------
Gross profit 103,198 80,451
Selling, general and
administrative expenses 20,518 16,642
Research and development
expense 16,928 14,220
--------------- ----------------
37,446 30,862
--------------- ----------------
Operating income 65,752 49,589
Other income (expense):
Interest income 3,901 1,896
Interest expense (2) (10)
Foreign currency (11,138) (7,564)
Other 297 (43)
--------------- ----------------
(6,942) (5,721)
--------------- ----------------
Income before income taxes 58,810 43,868
Income tax provision 11,409 9,212
--------------- ----------------
Net income $47,401 $34,656
=============== ================
Net income per share:
Basic $0.44 $0.32
Diluted $0.43 $0.32
Weighted average common shares outstanding:
Basic 108,408 108,197
Diluted 109,421 109,182
See accompanying notes.
5
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13-Weeks Ended
-------------------------------------
March 26, March 27,
2005 2004
-------------------------------------
Operating Activities:
Net income $47,401 $34,656
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 4,070 2,791
Amortization 5,372 2,665
Loss (gain) on sale of property and equipment (140) 105
Provision for doubtful accounts 146 116
Deferred income taxes 1,596 (8)
Foreign currency translation gains/losses 15,116 9,564
Provision for obsolete inventories 2,346 2,528
Changes in operating assets and liabilities:
Accounts receivable 8,440 5,987
Inventories (11,943) 1,602
Other current assets (337) (1,909)
Accounts payable (14,346) (12,719)
Other current liabilities (10,558) (1,072)
Income taxes (4,316) 7,969
---------------- ---------------
Net cash provided by operating activities 42,847 52,275
Investing activities:
Purchases of property and equipment (11,777) (17,779)
Purchase of intangible assets (177) (329)
Purchase of marketable securities, net (33,162) (27,015)
Change in restricted cash (22) -
Proceeds from sale of property and equipment - 25
---------------- ---------------
Net cash provided by investing activities (45,138) (45,098)
Financing activities:
Proceeds from issuance of common stock 1,104 680
---------------- ---------------
Net cash provided by financing activities 1,104 680
Effect of exchange rate changes on cash and cash equivalents 471 180
---------------- ---------------
Net increase in cash and cash equivalents (716) 8,037
Cash and cash equivalents at beginning of period 249,909 274,329
---------------- ---------------
Cash and cash equivalents at end of period $249,193 $282,366
================ ===============
See accompanying notes.
6
Garmin Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 26, 2005
(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 26, 2005 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 2005.
The condensed consolidated balance sheet at December 25, 2004 has been derived
from the audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 25, 2004.
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 26, 2005 and March 27, 2004 both contain
operating results for 13 weeks.
2. Inventories
The components of inventories consist of the following:
March 26, 2005 December 25, 2004
------------------------------------------------
Raw materials $72,233 $69,036
Work-in-process 34,868 29,959
Finished goods 70,083 67,274
Inventory reserves (10,755) (11,289)
------------------------------------------------
Inventory, net of reserves $166,429 $154,980
================================================
3. Stock Purchase Plan
The Board of Directors approved a share repurchase program on April 21, 2004,
authorizing the Company to purchase up to 3.0 million shares of Garmin Ltd.'s
common stock as market and business conditions warrant. The share repurchase
authorization expires on April 30, 2006. 100,000 shares have been repurchased
and retired under this plan as of March 26, 2005. These amounts have been
reported as a reduction in additional paid-in capital because companies
incorporated in the Cayman Islands are not permitted by law to hold treasury
stock.
4. Long Term Debt
Garmin had no long-term debt as of March 26, 2005 or December 25, 2004.
7
5. 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 26, March 27,
2005 2004
----------------------------------------
Numerator:
Numerator for basic and diluted net income
per share - net income $47,401 $34,656
========================================
Denominator:
Denominator for basic net income per share -
weighted-average common shares 108,408 108,197
Effect of dilutive securities -
employee stock options 1,013 985
----------------------------------------
Denominator for diluted net income per share -
adjusted weighted-average common shares 109,421 109,182
========================================
Basic net income per share $0.44 $0.32
========================================
Diluted net income per share $0.43 $0.32
========================================
There were 542,859 antidilutive options for the 13-week period ended March 26,
2005.
6. Comprehensive Income
Comprehensive income is comprised of the following (in thousands):
13-Weeks Ended
--------------------------------------
March 26, March 27,
2005 2004
--------------------------------------
Net income $47,401 $34,656
Translation adjustment 18,745 12,382
Change in fair value of available-for-sale
marketable securities, net of deferred taxes (3,561) (1,175)
--------------------------------------
Comprehensive income $62,585 $45,863
======================================
8
7. Segment Information
Revenues and income before income taxes for each of the Company's reportable
segments are presented below:
13-Weeks Ended
---------------------------------------------------------------
March 26, 2005 March 27, 2004
---------------------------------------------------------------
Consumer Aviation Consumer Aviation
Sales to external customers $137,475 $55,176 $123,499 $34,830
Income before income taxes $36,306 $22,504 $34,060 $9,808
---------------------------------------------------------------
Revenues and long-lived assets (property and equipment) by geographic area are
as follows for the 13-week periods ended March 26, 2005 and March 27, 2004:
North
America Asia Europe Total
----------------------------------------------------------------------------
March 26, 2005
Sales to external customers $132,629 $9,685 $50,337 $192,651
Long-lived assets $134,513 $45,357 $472 $180,342
March 27, 2004
Sales to external customers $107,364 $7,089 $43,876 $158,329
Long-lived assets $87,092 $32,860 $451 $120,403
9
8. Stock Compensation Plans
Accounting for Stock-Based Compensation
At March 26, 2005, 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.
13-Weeks Ended
-------------------------------------
March 26, March 27,
2005 2004
-------------------------------------
Net income as reported $47,401 $34,656
Deduct: Total stock-based employee compensation expense
determined under fair-value based method for all awards,
net of tax effects (1,616) (987)
-------------------------------------
Pro forma net income $45,785 $33,669
=====================================
Net income per share as reported:
Basic $0.44 $0.32
Diluted $0.43 $0.32
Pro forma net income per share:
Basic $0.42 $0.31
Diluted $0.42 $0.31
10
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. During 2004, 2003, and
2002, options to purchase 6,621, 3,648, and 5,058 shares, respectively, were
granted under this plan.
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 the first quarter of 2005, and
full years 2004 and 2003 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 Plan and the Directors' Plan for the period ended March 26, 2005 and
year ended December 25, 2004 is provided below:
Weighted-Average
Exercise Price Number of Shares
--------------------------
(In Thousands)
Outstanding at December 27, 2003 28.42 2,257
Granted 39.74 703
Exercised 17.12 (202)
Canceled 32.15 (33)
--------------------
Outstanding at December 25, 2004 32.12 2,725
Granted - -
Exercised 21.29 (102)
Canceled 32.08 (19)
--------------------
Outstanding at March 26, 2005 32.54 2,604
--------------------
There were no options granted during the 13-week periods ended March 26,
2005 and March 27, 2004, respectively.
The weighted-average remaining contract life for options outstanding at
March 26, 2005 is 7.77 years. Options outstanding at March 26, 2005 have
exercise prices ranging from $14.00 to $54.54. At March 26, 2005, options to
purchase 847,370 shares are exercisable.
11
9. 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.
13-Weeks Ended
-------------------------------------------
March 26, March 27,
2005 2004
------------------ ------------------
Balance - beginning of the period $15,518 $8,399
Accrual for products sold
during the period 5,136 5,282
Expenditures (5,876) (3,818)
------------------ ------------------
Balance - end of the period $14,778 $9,863
================== ==================
10. Commitments
Pursuant to certain supply agreements, the Company is contractually committed to
make purchases of approximately $90 million over the next 3 years.
11. Recent Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment",
which is a revision of SFAS No. 123. SFAS No.123 (R) requires all share-based
payments to employees, including grants of employee stock options, to be
recognized in the financial statements based on their fair values. As permitted
by SFAS No. 123, the company currently accounts for share-based payments to
employees using APB Opinion No. 25's intrinsic value method and, as such,
generally recognizes no compensation cost for employee stock options at the date
of grant. Accordingly, the adoption of SFAS No.123(R)'s fair value method will
have a significant impact on our result of operations, although it will have no
impact on our overall financial position. The impact of adoption of SFAS
No.123(R) cannot be predicted at this time because it will depend on levels of
share-based payments granted in the future. However, had we adopted SFAS
No.123(R) in prior periods, the impact of that standard would have approximated
the impact of SFAS No.123 as described in the disclosure of pro forma net income
and earnings per share as noted above. SFAS No.123(R) also requires the benefits
of tax deductions in excess of recognized compensation cost to be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption.
12
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 25, 2004. 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 25, 2004.
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.
13
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 26, 2005 March 27, 2004
--------------------------------------------------------
Net sales 100.0% 100.0%
Cost of goods sold 46.4% 49.2%
-------------------- ---------------------
Gross profit 53.6% 50.8%
Research and development 8.8% 9.0%
Selling, general and administrative 10.7% 10.5%
-------------------- ---------------------
Total operating expenses 19.5% 19.5%
-------------------- ---------------------
Operating income 34.1% 31.3%
Other income (expense), net (3.6%) (3.6%)
-------------------- ---------------------
Income before income taxes 30.5% 27.7%
Provision for income taxes 5.9% 5.8%
-------------------- ---------------------
Net income 24.6% 21.9%
==================== =====================
The following table sets forth our results of operations (in thousands) 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
--------------------------------------------------------------------------
March 26, 2005 March 27, 2004
--------------------------------------------------------------------------
Consumer Aviation Consumer Aviation
Net sales $137,475 $55,176 $123,499 $34,830
Cost of goods sold 70,971 18,482 64,028 13,850
------------- ------------- ------------- -------------
Gross profit 66,504 36,694 59,471 20,980
Operating expenses:
Selling, general and administrative 14,840 5,678 12,498 4,144
Research and development 8,921 8,007 7,202 7,018
------------- ------------- ------------- -------------
Total operating expenses 23,761 13,685 19,700 11,162
------------- ------------- ------------- -------------
Operating income 42,743 23,009 39,771 9,818
Other income (expense), net (6,437) (505) (5,711) (10)
------------- ------------- ------------- -------------
Income before income taxes $36,306 $22,504 $34,060 $9,808
============= ============= ============= =============
14
Comparison of 13-Weeks Ended March 26, 2005 and March 27, 2004
Net Sales
------------------------------------------------------------------------------------------------------------------------------
13-weeks ended March 26, 2005 13-weeks ended March 27, 2004 Quarter over Quarter
------------------------------------------------------------------------------------------------------------------------------
Net Sales % of Revenues Net Sales % of Revenues $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $137,475 71.4% $123,499 78.0% $13,976 11.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Aviation 55,176 28.6% 34,830 22.0% $20,346 58.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $192,651 100.0% $158,329 100.0% $34,322 21.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Increases in consumer sales for the 13-week period ended March 26, 2005
were primarily due to increased demand across nearly all product lines.
Increases in aviation sales were due to revenues from both panel-mount and
portable products as well as increased shipments to aviation OEM customers for
the 13-week period ended March 26, 2005. Approximately 31% of sales in the first
quarter of 2005 were generated from products introduced in the last twelve
months.
Total consumer and aviation unit sales increased 22% to 584,000 in the
first quarter of 2005 from 478,000 in the same period of 2004. The higher unit
sales volume in the first quarter of fiscal 2005 was primarily attributable to
the introduction of new products in the prior twelve months, as well as strength
in our existing product lines. Unit growth occurred in both consumer and
aviation segments.
Gross Profit
-----------------------------------------------------------------------------------------------------------
13-weeks ended March 26, 2005 13-weeks ended March 27, 2004 Quarter over Quarter
-----------------------------------------------------------------------------------------------------------
Gross Profit % of Revenues Gross Profit % of Revenues $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $66,504 48.4% $59,471 48.2% $7,033 11.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Aviation 36,694 66.5% 20,980 60.2% 15,714 74.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $103,198 53.6% $80,451 50.8% $22,747 28.3%
- ------------------------------------------------------------------------------------------------------------------------------------
Gross profit improvements within the consumer segment in the quarter ended
March 26, 2005, when compared to the same quarter in 2004, were driven primarily
by reduced transition costs, improved product mix within the segment, and better
component pricing.
Aviation gross margin improvements were primarily a result of favorable
product mix and reduced G1000 cockpit program costs versus the same quarter of
2004.
Selling, General and Administrative Expenses
----------------------------------------------------------------------------------------
13-weeks ended March 26, 2005 13-weeks ended March 27, 2004
------------------------------------------------------------------------------------------------------------------
Selling, General & Selling, General & Quarter over Quarter
Admin. Expenses % of Revenues Admin. Expenses % of Revenues $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $14,840 10.8% $12,498 10.1% $2,342 18.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Aviation $5,678 10.3% 4,144 11.9% 1,534 37.0%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $20,518 10.7% $16,642 10.5% $3,876 23.3%
- ------------------------------------------------------------------------------------------------------------------------------------
The increase in expense was driven primarily by increased advertising costs
($2.4 million), legal and accounting fees ($0.7 million), Oracle consulting
costs ($0.4 million), and increased call center expense ($0.3 million).
15
Research and Development Expense
--------------------------------------------------------------------------------------
13-weeks ended March 26, 2005 13-weeks ended March 27, 2004
-----------------------------------------------------------------------------------------------------------
Research & Research & Quarter over Quarter
Development % of Revenues Development % of Revenues $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $8,921 6.5% $7,202 5.8% $1,719 23.9%
- ------------------------------------------------------------------------------------------------------------------------------------
Aviation 8,007 14.5% 7,018 20.1% 989 14.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $16,928 8.8% $14,220 9.0% $2,708 19.0%
- ------------------------------------------------------------------------------------------------------------------------------------
The increase in expense was due to ongoing development activities for new
products, and the addition of 72 new engineering personnel to our staff since
March 2004 and an increase in engineering program costs during the first quarter
of 2005 as a result of our continued emphasis on product innovation.
Operating Income
------------------------------------------------------------------------------------------------------------------------------
13-weeks ended March 26, 2005 13-weeks ended March 27, 2004 Quarter over Quarter
------------------------------------------------------------------------------------------------------------------------------
Operating Income % of Revenues Operating Income % of Revenues $ Change % Change
- ------------------------------------------------------------------------------------------------------------------------------------
Consumer $42,743 31.1% $39,771 32.2% $2,972 7.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Aviation 23,009 41.7% 9,818 28.2% 13,191 134.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Total $65,752 34.1% $49,589 31.3% $16,163 32.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Operating income rose as a percent of revenue as a result of product mix
shift that included more sales of new, higher-margin products, offset in part by
increased research and development costs, legal and accounting fees, increased
marketing and call center costs, and Oracle implementation costs.
Other Income (Expense)
--------------------------------------------
13-weeks ended 13-weeks ended
March 26, 2005 March 27, 2004
- -----------------------------------------------------------------------------------------
Interest Income $3,901 $1,896
- -----------------------------------------------------------------------------------------
Interest Expense (2) (10)
- -----------------------------------------------------------------------------------------
Foreign Currency Exchange (11,138) (7,564)
- -----------------------------------------------------------------------------------------
Other 297 (43)
- -----------------------------------------------------------------------------------------
Total ($6,942) ($5,721)
- -----------------------------------------------------------------------------------------
The average taxable equivalent interest rate return on invested cash during
the first quarter of 2005 was 2.7% compared to 1.5% during the same quarter of
2004.
The $11.1 million currency loss was due to the weakening of the U.S. Dollar
compared to the Taiwan Dollar during the first quarter of fiscal 2005, when the
exchange rate decreased to 31.49 TD/USD at March 26, 2005 from 32.19 TD/USD at
December 25, 2004. The $7.6 million loss in the same quarter of 2004 was due to
the weakening of the U.S. Dollar compared to the Taiwan Dollar during the first
quarter of fiscal 2004, when the exchange rate decreased to 33.27 TD/USD at
March 27, 2004 from 34.05 TD/USD at December 27, 2003.
Income Tax Provision
Income tax expense increased by $2.2 million, to $11.4 million, for the
13-week period ended March 26, 2005 from $9.2 million for the 13-week period
ended March 27, 2004 due to our higher income before taxes. The effective tax
16
rate fell to 19.4% from 21.0% due to incremental tax holidays applied for in
Taiwan during 2004 and the first quarter of 2005.
Net Income
As a result of the above, net income increased 36.6% for the 13-week period
ended March 26, 2005 to $47.4 million compared to $34.7 million for the 13-week
period ended March 27, 2004.
Liquidity and Capital Resources
Net cash generated by operating activities was $42.8 million for the
13-week period ended March 26, 2005 compared to $52.3 million for the 13-week
period ended March 27, 2004. We attempt to carry sufficient inventory levels of
finished goods and key components so that potential supplier shortages have as
minimal an impact as possible on our ability to deliver our finished products.
We experienced a $11.4 million increase in inventory at March 26, 2005 when
compared to inventory on December 25, 2004. Inventory levels increased
year-to-date in 2005 primarily due to higher sales volumes during the year and
the accumulation of components ahead of manufacturing product necessary to meet
demand during the second quarter of 2005. Accounts receivable decreased $8.4
million due to payments received on the shipment of new products into the retail
channel during the first quarter of 2005.
Cash flow from investing activities during the 13-week period ending March
26, 2005 was a $45.1 million use of cash. Cash flow used in investing activities
principally related to $11.8 million in capital expenditures primarily related
to business operation and maintenance activities, the net purchase of $33.1
million of fixed income securities associated with the investment of our on-hand
cash balances, and the payment of prepaid license fees of $0.2 million as a
result of long-term agreements with key suppliers to achieve favorable pricing.
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 period was approximately 2.7%.
Cash flow from financing activities during the period was a $1.1 million
source of cash, which represents the issuance of common stock related to our
Company stock option plan.
We currently use cash flow from operations to fund our capital expenditures
and to support our working capital requirements. We expect that future cash
requirements will principally be for capital expenditures, working capital
requirements, repurchase of shares, and payment of dividends declared.
We believe that our existing cash balances and cash flow from operations
will be sufficient to meet our projected capital expenditures, working capital,
repurchase of shares, and other cash requirements at least through the end of
fiscal 2005.
Contractual Obligations and Commercial Commitments
Pursuant to certain supply agreements, the Company is contractually
committed to make purchases of approximately $90 million over the next 3 years.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
17
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 economic 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. In
recent quarters we have experienced an increase in raw materials costs and an
increase in the sale of lower-margin products as a part of the product mix,
resulting in reduced gross margins.
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 increased 0.2% during the first
three months of 2005 and resulted in a foreign currency loss of $11.1 million.
If the exchange rate increased by a similar percentage, a comparable foreign
currency gain would be recognized.
Interest Rate Risk
As of March 26, 2005, we have no interest rate risk as we have no
outstanding long term debt.
18
Item 4. Controls and Procedures
(a) Evaluation of disclosure controls and procedures. The Company maintains a
system of disclosure controls and procedures that are designed to provide
reasonable assurance that information, which is required to be timely disclosed,
is accumulated and communicated to management in a timely fashion. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance that the objectives of the control system are met. As of
March 26, 2005, the Company carried out an evaluation, under the supervision and
with the participation of the Company's management, including the Company's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
Company's disclosure controls and procedures. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded as of March 26,
2005 that our disclosure controls and procedures were effective such that the
information relating to the Company, required to be disclosed in our Securities
and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms, and (ii)
is accumulated and communicated to the Company's management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
(b) Changes in internal control over financial reporting. There has been no
change in the Company's internal controls over financial reporting that occurred
during the Company's fiscal quarter ended March 26, 2005 that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
19
Part II - Other Information
Item 1. Legal Proceedings
From time to time the Company is involved in litigation arising in the
course of its operations. As of May 2, 2005, the Company was not a
party to any legal proceedings that management believes would have a
material adverse effect upon the consolidated results of operations or
financial condition of the Company.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Board of Directors approved a share repurchase program on April
21, 2004, authorizing the Company to purchase up to 3,000,000 shares
of the Company as market and business conditions warrant. The share
repurchase authorization expires on April 30, 2006. No shares were
repurchased in the fiscal quarter ended March 26, 2005.
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
20
Item 6. Exhibits
Exhibits
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a).
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a).
Exhibit 32.1 Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibit 32.2 Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
Exhibits 32.1 and 32.2 shall not be deemed "filed" for the
purposes of or otherwise subject to the liabilities under Section
18 of the Securities Exchange Act of 1934 and shall not be deemed
to be incorporated by reference into the filings of the Company
under the Securities Act of 1933.
21
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 4, 2005
22
INDEX TO EXHIBITS
Exhibit No. Description Page
Exhibit 31.1 Certification of Chief Executive Officer
pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a). 24
Exhibit 31.2 Certification of Chief Financial Officer
pursuant to Exchange Act Rule 13a-14(a) or
15d-14(a). 25
Exhibit 32.1 Certification of Chief Executive Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 26
Exhibit 32.2 Certification of Chief Financial Officer
pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 27
23
EXHIBIT 31.1
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 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
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 4, 2005 By /s/ Min H. Kao
--------------------------
Min H. Kao
Chairman and
Chief Executive Officer
24
EXHIBIT 31.2
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 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
report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, 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) designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an
annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.
Date: May 4, 2005 By /s/ Kevin Rauckman
------------------------------
Kevin Rauckman
Chief Financial Officer
25
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Garmin Ltd. (the "Company") on Form
10-Q for the period ending March 26, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Min H. Kao, Chairman
and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report 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 Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Date: May 4, 2005 By /s/ Min H. Kao
------------------------
Min H. Kao
Chairman and
Chief Executive Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company 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.
26
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of Garmin Ltd. (the "Company") on Form
10-Q for the period ending March 26, 2005 as filed with the Securities and
Exchange Commission on the date hereof (the "Report"), I, Kevin Rauckman, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report 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 Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Date: May 4, 2005 By /s/ Kevin Rauckman
---------------------------
Kevin Rauckman
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company 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.
27