Garmin 10-Q 2011
Securities and Exchange Commission
Washington, D.C. 20549
For the quarterly period ended June 25, 2011
For the transition period from to
Commission file number 0-31983
(Exact name of Company as specified in its charter)
Company's telephone number, including area code: 41 52 630 1600
Vorstadt 40/42, 8200 Schaffhausen, Switzerland
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Company (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ Accelerated Filer ¨ Non-accelerated Filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO þ
Number of shares issued and registered of the registrant’s common shares as of August 1, 2011
CHF 10.00 par value: 208,077,418 (including treasury shares)
Quarter Ended June 25, 2011
Table of Contents
Quarter Ended June 25, 2011
Part I – Financial Information
Item 1. Condensed Consolidated Financial Statements
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, 2010. Additionally, the Condensed Consolidated Financial Statements should be read in conjunction with Item 2 of Management's Discussion and Analysis of Financial Condition and Results of Operations, included in this Form 10-Q.
The results of operations for the 13-week and 26-week periods ended June 25, 2011 are not necessarily indicative of the results to be expected for the full year 2011.
Condensed Consolidated Balance Sheets
(In thousands, except share information)
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
See accompanying notes.
Garmin Ltd. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
June 25, 2011
(In thousands, except share and per share information)
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the 13-week and 26-week periods ended June 25, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.
The condensed consolidated balance sheet at December 25, 2010 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, 2010.
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 and year-to-date periods ended June 25, 2011 and June 26, 2010 both contain operating results for 13-weeks and 26-weeks, respectively.
The components of inventories consist of the following:
The Board of Directors approved a share repurchase program on February 12, 2010, authorizing the Company to purchase up to $300,000 of its common shares as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The share repurchase authorization expires on December 31, 2011. As of June 25, 2011, the Company had repurchased 7,366,646 shares using cash of $223,149 with all purchases made prior to fiscal 2011. There remains approximately $76,851 available for repurchase under this authorization.
In addition, 522,856 shares repurchased for $16,723 prior to the Company’s redomestication to Switzerland on June 27, 2010, but for which transactions settled after that date, were treated as retired when such shares were still in treasury. These shares were reflected as additional treasury shares during the 13-weeks ended March 26, 2011 with a corresponding increase to retained earnings.
The following table sets forth the computation of basic and diluted net income per share:
There were 5,959,686 anti-dilutive options for the 13-week period ended on June 25, 2011. There were 6,186,519 anti-dilutive options for the 13-week period ended June 26, 2010.
There were 6,001,583 anti-dilutive options for the 26-week period ended on June 25, 2011. There were 6,198,202 anti-dilutive options for the 26-week period ended June 26, 2010.
There were 72,545 shares issued as a result of exercises of stock appreciation rights and stock options for the 13-week period ended June 25, 2011. There were 73,574 shares issued as a result of exercises of stock appreciation rights and stock options for the 13-week period ended June 26, 2010.
There were 251,916 shares issued as a result of exercises of stock appreciation rights and stock options for the 26-week period ended June 25, 2011. There were 365,288 shares issued as a result of exercises of stock appreciation rights and stock options for the 26 week period ended June 26, 2010.
Comprehensive income is comprised of the following:
Beginning in 2011, for external reporting purposes, the Company has identified five operating segments – Auto/Mobile, Aviation, Marine, Outdoor and Fitness. Each operating segment is individually reviewed and evaluated by our Chief Operating Decision Maker, who allocates resources and assesses performance of each segment individually. Prior to 2011, the Outdoor and Fitness operating segments were combined into a single reportable segment due to the similar nature of those products, their production processes, the types of customers served, their distribution processes, and similar economic conditions. Management re-evaluated the combination of these operating segments and determined that based on the growth of these segments they should now be reported as two distinct reportable segments.
Net sales, operating income, and income before taxes for each of the Company’s reportable segments are presented below:
Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis.
Net sales and property and equipment, net by geographic area are as follows as of and 26-week periods ended June 25, 2011 and June 26, 2010:
The Company’s products sold are generally covered by a warranty for periods ranging from one to three 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.
The 13-weeks and 26-weeks ended June 26, 2010 include the effect of a refinement in the estimated warranty reserve which decreased the accrual for the periods by $21,000 and $42,776, respectively.
We are a party to certain commitments, which includes raw materials, advertising and other indirect purchases in connection with conducting our business. Pursuant to these agreements, the Company is contractually committed to make purchases of approximately $14,697 over the next 5 years.
9. Income Taxes
Our earnings before taxes decreased from $164,409 in the second quarter of 2010 to $127,072 in the second quarter of 2011, while our income tax expense decreased by $11,998, to $17,595 for the 13-week period ended June 25, 2011, from $29,593 for the 13-week period ended June 26, 2010. The effective tax rate was 13.8% in the second quarter of 2011 and 18.0% in the second quarter of 2010. The effective tax rate was 8.5% in the first half of 2011 and 18.0% in the first half of 2010. The change in the effective tax rate was primarily due to the first quarter release of reserves related to the expiration of certain statutes for Garmin Europe and lower reserves provided in 2011 following favorable audits in both 2010 and 2011.
10. Fair Value Measurements
The Accounting Standards Codification (ASC) defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The ASC classifies the inputs used to measure fair value into the following hierarchy:
The Company endeavors to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
For fair value measurements using significant unobservable inputs, an independent third party provided the valuation. The collateral composition was used to estimate weighted average life based on historical and projected payment information. Cash flows were projected for the issuing trusts, taking into account underlying loan principal, bonds outstanding, and payout formulas. Taking this information into account, assumptions were made as to the yields likely to be required, based upon then current market conditions for comparable or similar term asset based securities as well as other fixed income securities.
Assets and liabilities measured at estimated fair value on a recurring basis are summarized below:
All Level 3 investments have been in a continuous unrealized loss position for 12 months or longer. However, it is the Company’s intent to hold these securities until they recover their value. For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, the ASC requires a reconciliation of the beginning and ending balances, separately for each major category of assets. The reconciliation is as follows:
The following is a summary of the company’s marketable securities classified as available-for-sale securities at June 25, 2011:
The following is a summary of the company’s marketable securities classified as available-for-sale securities at December 25, 2010:
The cost of securities sold is based on the specific identification method.
The amortized cost and estimated fair value of marketable securities at June 25, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because the issuers of the securities may have the right to prepay obligations without prepayment penalties.
11. Subsequent Events
On July 26, 2011, a subsidiary of Garmin Ltd. acquired Navigon AG, a privately-held navigation provider based in Hamburg, Germany.
On June 30, 2011, a subsidiary of Garmin Ltd. acquired Tri-Tronics Inc., the leading designer and manufacturer of electronic dog training equipment.
In aggregate, these acquisitions are not material.
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, 2010. 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, 2010.
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 five business segments, the outdoor, fitness, marine, automotive/mobile and aviation markets. Our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.
Results of Operations
The following table sets forth our results of operations as a percentage of net sales during the periods shown:
The Company manages its operations in five segments: outdoor, fitness, marine, automotive/mobile, and aviation, and each of its segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The following table sets forth our results of operations (in thousands) including revenue (net sales), operating income, and income before taxes for each of our five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, automotive/mobile, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.
Comparison of 13-Weeks Ended June 25, 2011 and June 26, 2010
(Amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net sales decreased 8% for the 13-week period ended June 25, 2011 when compared to the year-ago quarter. The decrease occurred in the automotive/mobile segment with partially offsetting growth in all other segments. Automotive/mobile revenue remains the largest portion of our revenue mix at 54% in the second quarter of 2011 compared to 61% in the second quarter of 2010.
Total unit sales decreased 6% to 3,756 in the second quarter of 2011 from 4,004 in the same period of 2010. The decrease in unit sales volume in the second quarter of fiscal 2011 was primarily attributable to declining volumes in the automotive/mobile segment. The fitness and marine segments posted 28% and 23% volume increases, respectively.
Automotive/mobile segment revenue decreased 19% from the year-ago quarter, as volumes decreased 11% and the average selling price (ASP) decreased 9%. Volumes declined in the North American market as competitive technologies reduced the portable navigation device (PND) market. ASP declines resulted from product mix shifting toward products bundled with lifetime maps requiring the net deferral of $62 million of revenue and the impact of $27 million of revenue from mobile handsets in the year ago quarter, which had considerably higher ASPs than other automotive/mobile products. Revenues in our fitness segment increased 25% from the year-ago quarter on the strength of recent product introductions that expand the addressable market and ongoing global penetration in the segment. Aviation revenues increased 13% from the year-ago quarter as the Company began to ship updated panel mount avionics products.
Cost of Goods Sold