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 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--
Commission file number 0-31983
----------------
GARMIN LTD.
(Exact name of Company as specified in its charter)
Cayman Islands 98-0229227
(State or other jurisdiction (I.R.S. Employer identification no.)
of incorporation or organization)
5th Floor, Harbour Place, P.O. Box 30464 SMB, N/A
103 South Church Street (Zip Code)
George Town, Grand Cayman, Cayman Islands
(Address of principal executive offices)
Company's telephone number, including area code: (345) 946-5203*
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 [ ]
Number of shares outstanding of the Company's common shares as of May 9, 2002:
Common Shares, $.01 par value - 107,792,368
*The executive offices of the Registrant's principal United States subsidiary
are located at 1200 East 151st Street, Olathe, Kansas 66062. The telephone
number there is (913) 397-8200.
Garmin Ltd.
Form 10-Q
Quarter Ended March 30, 2002
Table of Contents
Part I - Financial Information Page
Item 1. Condensed Consolidated Financial Statements (unaudited)
Introductory Comments 3
Condensed Consolidated Balance Sheets at March 30, 2002
and December 29, 2001 4
Condensed Consolidated Statements of Income for the
13-weeks ended March 30, 2002 and March 31, 2001 5
Condensed Consolidated Statements of Cash Flows for the
13-weeks ended March 30, 2002 and March 31, 2001 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 15
Part II - Other Information
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
Signature Page 18
Garmin Ltd.
Form 10-Q
Quarter Ended March 30, 2002
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 29, 2001. Additionally, the Condensed Consolidated Financial
Statements should be read in conjunction with Item 2. 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 30, 2002 are
not necessarily indicative of the results to be expected for the full year 2002.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
------------------------------------
(Unaudited)
March 30, December 29,
2002 2001
-------------------------------------
Assets
Current assets:
Cash and cash equiva $225,879 $192,842
Marketable securitie 28,216 40,835
Accounts receivable, net 48,296 47,998
Inventories 53,725 61,132
Deferred income taxes 7,289 7,007
Prepaid expenses and other current assets 3,660 2,921
--------- -----------
Total current assets 367,065 352,735
Property and equipment, net 72,106 70,086
Marketable securities 112,320 90,749
Restricted cash 1,600 1,600
Other assets, net 16,388 16,985
--------------- ----------------
Total assets $569,479 $532,155
=============== ================
Liabilities and Stockholder's Equity
Current liabilities:
Accounts payable $19,225 $18,837
Other accrued expenses 17,499 13,570
Income taxes payable 20,125 12,444
Current portion of long-term debt 1,334 4,177
--------------- ----------------
Total current liabilities 58,183 49,028
Long-term debt, less current portion 28,011 28,011
Deferred income taxes 1,630 1,147
Stockholders' equity:
Preferred stock, $1.00 par value,
1,000,000 authorized, none issued - -
Common stock, $0.01 par value,
500,000,000 shares authorized:
Issued and outstanding shares-107,776,709 1,078 1,078
Additional paid-in capital 127,131 127,131
Retained earnings 391,848 365,087
Accumulated other comprehensive loss (38,402) (39,327)
--------------- ----------------
Total stockholders' equity 481,655 453,969
--------------- ----------------
Total liabilities and stockholders' equity $569,479 $532,155
=============== ================
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
13-Weeks Ended
--------------------------------------
March 30, March 31,
2002 2001
--------------------------------------
Net sales $100,856 $85,534
Cost of goods sold 46,364 39,616
--------------- ----------------
Gross profit 54,492 45,918
Selling, general and
administrative expenses 11,239 9,259
Research and development
expense 7,973 6,296
--------------- ----------------
19,212 15,555
--------------- ----------------
Operating income 35,280 30,363
Other income (expense):
Interest income 1,625 3,286
Interest expense (371) (768)
Foreign currency (733) (1,103)
Other 71 123
--------------- ----------------
592 1,538
--------------- ----------------
Income before income taxes 35,872 31,901
Income tax provision 9,111 8,102
--------------- ----------------
Net income $26,761 $23,799
=============== ================
Net income per share
Basic $0.25 $0.22
Diluted $0.25 $0.22
Weighted average common
shares outstanding:
Basic 107,777 108,242
Diluted 108,137 108,608
See accompanying notes.
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13-Weeks Ended
-------------------------------------------
March 30, March 31,
2002 2001
-------------------------------------------
Operating Activities:
Net income $26,761 $23,799
Depreciation & amortization 2,929 2,384
Provision for doubtful accounts 845 74
Provision for obsolete inventory 454 460
Foreign currency translation 495 98
Deferred income taxes 201 339
Changes in operating assets and liabilities:
Accounts receivable (1,021) (15,753)
Inventories 7,077 3,820
Other current assets (737) (1,342)
Accounts payable 303 (7,428)
Other current liabilities 4,175 (1,786)
Income taxes 6,844 2,780
----------- ----------------
Net cash provided by operating activities 48,326 7,445
Investing activities:
Purchases of property and equipment (3,643) (4,709)
Purchase of investments, net (8,949) -
Change in restricted cash - 3,204
Other (382) (1,307)
----------- ----------------
Net cash used in investing activities (12,974) (2,812)
Financing activities:
Principal payments on long term debt (2,851) (2,484)
----------- ----------------
Effect of exchange rate changes on cash 536 (862)
Net increase in cash 33,037 1,287
Cash at beginning of period 192,842 251,732
---------- ----------------
Cash at end of period $225,879 $253,019
============== ================
Supplemental disclosures of noncash investing
and financing activities:
Change in fair value of liability related to
cash flow hedges $61 -
See accompanying notes.
Garmin Ltd.
Notes to Condensed Consolidated Financial Statements (Unaudited)
March 30, 2002
(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 30, 2002 are
not necessarily indicative of the results that may be expected for the year
ended December 28, 2002.
The condensed consolidated balance sheet at December 29, 2001 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 condensed consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended December 29,
2001.
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 30, 2002 and March 31, 2001 both contain
operating results for 13 weeks.
2. Recent Pronouncements
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of, and the accounting and reporting provisions
of APB Opinion No. 30, Reporting the Results of Operations, for a disposal of a
segment of a business. SFAS No. 144 is effective for fiscal years beginning
after December 15, 2001, with earlier application encouraged. The Company has
adopted SFAS No. 144 as of December 30, 2001. The adoption of this statement has
not had any impact on the Company's financial position and results of
operations.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 supercedes APB Opinion
No. 16, Business Combinations, and FASB Statement No. 28, Accounting for
Preacquisition Contingencies of Purchased Enterprises. This statement requires
accounting for all business combination using the purchase method, and changes
the criteria for recognizing intangible assets apart from goodwill. This
statement is effective for all business combinations initiated after June 30,
2001. SFAS No. 142 supercedes APB Opinion No. 17, Intangible Assets, and
addresses how purchased intangibles should be accounted for upon acquisition.
The statement also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. All intangibles will be subject to periodic impairment testing and
will be adjusted to fair value.
The Company has adopted SFAS No. 142 effective December 30, 2001. Application of
the nonamortization and impairment provisions of the statement has not
significantly impacted the Company's financial position and results of
operations.
3. Inventories
The components of inventory consist of the following:
March 30, 2002 December 29, 2001
-----------------------------------------
Raw materials $21,096 $23,868
Work-in-process 7,254 8,974
Finished goods 25,375 28,290
------- -------
Inventory, net of reserves $53,725 $61,132
======= =======
-----------------------------------------
4. Stock Repurchase Plan
On September 24, 2001, Garmin announced that its Board of Directors approved a
share repurchase program authorizing Garmin to purchase up to five million
common shares of Garmin Ltd. as market and business conditions warrant. The
purchases may be made from time to time on the open market or in negotiated
transactions in compliance with Rule 10b-18 promulgated by the Securities and
Exchange Commission. The timing and amounts of any purchases will be determined
by Garmin's management depending on market conditions and other factors deemed
relevant. The share repurchase authorization expires on December 31, 2002. As of
March 30, 2002, Garmin had purchased a total of 595,200 shares pursuant to this
share repurchase authorization at a total cost of $9.8 million. All such
purchased shares have been cancelled and now form part of the authorized but
unissued capital of Garmin, since Cayman Islands law does not permit a company
to hold its own shares. There were no shares repurchased during the 13-week
period ended March 30, 2002.
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 30, March 31,
2002 2001
------------------------------
------------------------------
Numerator:
Numerator for basic and diluted net income
per share - net income $26,761 $23,799
==============================
Denominator:
Denominator for basic net income per share -
weighted-average common shares 107,777 108,242
Effect of dilutive securities - employee
stock options 360 366
-----------------------------
Denominator for diluted net income per
share - adjusted weighted-average common
shares 108,137 108,608
=============================
Basic net income per share $0.25 $0.22
=============================
Diluted net income per share $0.25 $0.22
=============================
Options to purchase 361,875 shares of common stock at prices ranging from $20.25
to $22.54 per share were outstanding during the 13-week period ended March 30,
2002, but were not included in the computation of diluted earnings per share
because the options' exercise price was greater than the average market price of
the common shares and, therefore, the effect would be antidilutive.
6. Comprehensive Income
Comprehensive income is comprised of the following:
13-Weeks Ended
---------------------------------
March 30, 2002 March 31, 2001
---------------------------------
(in thousands)
Net income $26,761 $23,799
Translation adjustment 962 940
Change in fair value of effective portion
of cash flow hedges, net of deferred
taxes of $25 (37) --
-------------- ------------
Comprehensive income $27,686 $24,739
============== ============
----------------------------------
7. Segment Information
Revenues and income before income taxes for each of the Company's reportable
segments are presented below:
13-Weeks Ended
----------------------------------------------------------
March 30, 2002 March 31, 2001
------------------------------ ---------------------------
Consumer Aviation Consumer Aviation
(in thousands)
Sales to external
customers $74,747 $26,109 $58,524 $27,010
Income before
income taxes $25,149 $10,723 $20,006 $11,895
----------------------------------------------------------
Revenues and long-lived assets (property and equipment) by geographic area are
as follows for the 13-week periods ended March 30, 2002 and March 31, 2001:
North America Asia Europe Total
---------------------------------------------
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
March 31, 2001
Sales to external customers $60,789 $3,928 $20,817 $85,534
Long-lived assets 36,353 31,241 489 68,083
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 29, 2001. 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 29, 2001.
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 30, 2002 March 31, 2001
------------------------------------
Net sales 100.0% 100.0%
Cost of goods sold 46.0% 46.3%
----- -----
Gross profit 54.0% 53.7%
Selling, general and 11.1% 10.8%
administrative
Research and development 7.9% 7.4%
---- ----
Total operating expenses 19.0% 18.2%
----- -----
Operating income 35.0% 35.5%
Other income, net 0.5% 1.8%
---- ----
Income before income taxes 35.5% 37.3%
Provision for income taxes 9.1% 9.5%
---- ----
Net income 26.5% 27.8%
===== =====
----------------------------------
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 consolidated statements of income included in
Item 1.
13-Weeks Ended
-----------------------------------------------
March 30, 2002 March 31, 2001
-----------------------------------------------
Consumer Aviation Consumer Aviation
(in thousands)
Net sales $74,747 $26,109 $58,524 $27,010
Cost of goods sold 36,080 10,284 28,552 11,064
------ ------ ------ ------
Gross profit 38,667 15,825 29,972 15,946
Operating expenses:
Selling, general and
administrative 8,899 2,340 6,657 2,602
Research and 4,975 2,998 4,235 2,061
development ----- ----- ----- -----
Total operating expenses 13,874 5,338 10,892 4,663
------ ----- ------ -----
Operating income 24,793 10,487 19,080 11,283
Other income, net 357 235 926 612
------ ------ ------ ------
Income before
income taxes $25,150 $10,722 $20,006 $11,895
======= ======= ======= =======
-----------------------------------------------
Comparison of 13-Weeks Ended March 30, 2002 and March 31, 2001
Net Sales
Net sales increased $15.3 million, or 17.9%, to $100.9 million for the
13-week period ended March 30, 2002, from $85.5 million for the 13-week period
ended March 31, 2001. The increase for the 13-week period ended March 30, 2002
was primarily due to the success of the 25 new products that were introduced
during fiscal year 2001 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 74.1% of net sales for the first
quarter of 2002 compared to 68.4% during the first quarter of 2001. Sales from
our aviation products accounted for 25.9% for the first quarter of 2002 compared
to 31.6% during the first quarter of 2001. Total consumer and aviation units
decreased 3.6% to 313,028 in 2002 from 324,603 in 2001. The higher unit volume
in the first quarter of fiscal 2001 was primarily attributable to the
introduction of higher volume new products in our consumer segment.
Net sales for the consumer segment increased $16.2 million, or 27.7%, to
$74.8 million for the 13-week period ended March 30, 2002, from $58.5 million
for the 13-week period ended March 31, 2001. The increase for the 13-week period
ended March 30, 2002 was primarily due to the success of the 22 new consumer
products introduced during fiscal year 2001 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 decreased $0.9 million, or 3.3%, to
$26.1 million for the 13-week period ended March 30, 2002, from $27.0 million
for the 13-week period ended March 31, 2001. The decrease for the 13-week period
ended March 30, 2002 was primarily due to the remaining economic effects of the
terrorist attacks that occurred on September 11, 2001. The aviation segment
exhibited a sequential revenue increase of $2.9 million, or 12.5%, to $26.1
million during the quarter compared to $23.2 million during the fourth quarter
of fiscal year 2001. We believe that this sequential revenue increase in our
aviation segment is a signal of a modest economic recovery occurring in the
general aviation market.
Gross Profit
Gross profit increased $8.6 million, or 18.7%, to $54.5 million for the
13-week period ended March 30, 2002, from $45.9 million for the 13-week period
ended March 31, 2001. This increase was primarily attributable to an increase in
revenues due to the success of the 25 new products that were introduced during
fiscal year 2001 and overall demand for our consumer products associated with a
strong marine and recreation selling season during the quarter. Gross profit as
a percentage of net sales remained relatively flat at 54.0% for the 13-week
period ended March 30, 2002 compared to 53.7% for the 13-week period ended March
31, 2001.
Gross profit for the consumer segment increased $8.7 million, or 29.0%, to
$38.7 million for the 13-week period ended March 30, 2002, from $30.0 million
for the 13-week period ended March 31, 2001. This increase is primarily
attributable to the increase in consumer revenue, improved manufacturing
efficiencies on many of our new products introduced during fiscal year 2001, and
a reduction of raw material costs. Gross profit as a percentage of net sales
remained relatively flat at 51.7% for the 13-week period ended March 30, 2002
compared to 51.2% for the 13-week period ended March 31, 2001.
Gross profit for the aviation segment decreased $0.1 million, or 0.8%, to
$15.8 million for the 13-week period ended March 30, 2002, from $15.9 million
for the 13-week period ended March 31, 2001. This decrease is associated with
the decline in revenues in our aviation segment during the quarter. Gross profit
as a percentage of net sales increased to 60.6% for the 13-week period ended
March 30, 2002 from 59.0% for the 13-week period ended March 31, 2001. This
increase as a percentage of net sales was primarily attributed to product mix as
we experienced a 9.8% increase in higher margin panel mount unit sales during
2002 when compared to 2001.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.0 million, or
21.4%, to $11.2 million (11.1% of net sales) for the 13-week period ended March
30, 2002, from $9.3 million (10.8% of net sales) for the 13-week period ended
March 31, 2001. Selling, general and administrative expenses increased $2.2
million, or 33.7%, in the consumer segment and decreased $0.3 million, or 10.1%,
in the aviation segment. The increase in expense was primarily attributable to
increases in employment generally across the organization, increased advertising
costs (up 27%) associated with new product releases, increased administrative
expenses due to marketing support and airport infrastructure expenses associated
with our new 25,000 sq.ft. flight test and certification facility located at New
Century Airport near our Olathe, Kansas facility.
Research and Development Expense
Research and development expenses increased $1.7 million, or 26.6%, to $8.0
million (7.9% of net sales) for the 13-week period ended March 30, 2002, from
$6.3 million (7.4% of net sales) for the 13-week period ended March 31, 2001.
Research and development expenses increased $0.7 million, or 17.5%, in the
consumer segment and $0.9 million, or 45.5%, in the aviation segment. The
increase in expense was primarily due to the introduction of six recently
developed products within our consumer segment during the quarter and the
addition of 58 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 30, 2002 increased to
$35.3 million, or 16.2% from $30.4 million for the 13-week period ended March
31, 2001. Operating income as a percentage of net sales decreased to 35.0% for
the 13-week period ended March 30, 2002, from 35.5% for the 13-week period ended
March 31, 2001 as a result of overall increases in operating expenses, as we
continue to invest in personnel and product innovation in advance of anticipated
future revenue growth.
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 30, 2002 amounted to $0.6 million compared to other
income of $1.5 million for the 13-week period ended March 31, 2001. Interest
income for the 13-week period ended March 30, 2002 amounted to $1.6 million
compared to $3.3 million for the 13-week period ended March 31, 2001, the
decrease being attributable to the reduction in interest rates during the last
12 months. The average taxable equivalent interest rate return on invested cash
during the quarter was 2.2% compared to 4.0% during fiscal year 2001. Interest
expense decreased to $0.4 million for the 13-week period ended March 30, 2002
from $0.8 million for the 13-week period ended March 31, 2001, due primarily to
the retirement of debt associated with our Taiwan facility and a lower interest
rate environment during the first quarter of fiscal 2002.
We recognized a foreign currency exchange loss of $0.7 million for the
13-week period ended March 30, 2002 compared to a loss of $1.1 million for the
13-week period ended March 31, 2001. 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 29, 2001. The $1.1 million loss was
due to the weakness of the U.S. Dollar compared to the Taiwan Dollar during the
first quarter of fiscal 2001, when the exchange rate decreased to 32.85 TD/USD
at March 31, 2001 from 33.01 TD/USD at December 30, 2000.
Income Tax Provision
Income tax expense increased by $1.0 million, to $9.1 million, for the
13-week period ended March 30, 2002 from $8.1 million for the 13-week period
ended March 31, 2001 due to our higher taxable income. The effective tax rate
remained flat at 25.4%.
Net Income
As a result of the above, net income increased 12.4% for the 13-week period
ended March 30, 2002 to $26.8 million compared to $23.8 million for the 13-week
period ended March 31, 2001.
Liquidity and Capital Resources
Net cash generated by operating activities was $48.3 million for the
13-week period ended March 30, 2002 compared to $7.4 million for the 13-week
period ended March 31, 2001. The increase in operating cash flow was primarily
due to a higher level of inventory reductions during the first quarter of fiscal
2002 and the timing of new product shipments causing an increase in accounts
receivable during the prior year period. 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 did experience a $7.4 million
further reduction in inventory at March 30, 2002 when compared to fiscal
year-end December 29, 2001. We increased inventory levels at the end of fiscal
year 2000 due partially to industry shortages of certain raw materials. These
raw material shortages have since normalized and we believe that it is not
necessary at this time to carry an unusual level of raw material inventory as we
did at December 30, 2000.
Cash flow from investing activities during the 13-week period ending March
30, 2002 was a $13.0 million use of cash. Cash flow used in investing activities
principally relates to $3.6 million in capital expenditures and the net purchase
of $8.9 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 2.2%.
Cash flow from financing activities during the period was a use of cash due
to the retirement of $2.9 million of debt associated with our Taiwan facility.
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 2002.
Contractual Obligations and Commercial Commitments
On March 23, 2000, Garmin International, Inc. completed a $20.0 million
20-year Taxable Industrial Revenue Bond issuance for the expansion of its
Olathe, Kansas facility. At March 30, 2002 and March 31, 2001, outstanding
principal under the 2000 Bonds totaled $20.0 million. Interest on the 2000 Bonds
is payable monthly at a variable interest rate (2.0% at March 30, 2002), which
is adjusted weekly to
the current market rate as determined by the remarketing agent of the 2000 Bonds
with principal due upon maturity on April 15, 2020.
The 2000 Bonds are secured by an irrevocable letter of credit totaling
$20.3 million with facility fees of 0.75%. This renewable letter of credit
initially expires on September 20, 2004. The bank has required a sinking fund be
established with semiannual payments of $0.7 million beginning April 2002.
On January 1, 1995, Garmin International, Inc. completed a $9.5 million
30-year Tax-Exempt Industrial Revenue Bond issuance for the construction of its
corporate headquarters located in Olathe, Kansas. Upon completion of the project
in 1996, Garmin International retired bonds totaling $0.2 million. At March 30,
2002 and March 31, 2001, outstanding principal under the Bonds totaled $9.3
million. Interest on the Bonds is payable monthly at a variable interest rate
(2.0% and 4.1% at March 30, 2002 and March 31, 2001, respectively), which is
adjusted weekly to the current market rate as determined by the remarketing
agent for the Bonds with principal due upon maturity on January 1, 2025.
The Bonds are secured by an irrevocable letter of credit totaling $9.7
million, with facility fees of 0.75% annually, through September 30, 2004,
renewable on an annual basis thereafter. The bank has the option of requiring
Garmin International, Inc. to establish a sinking fund related to the principal
balance outstanding on the Bonds, which it had not exercised through March 30,
2002. The letter of credit is secured by a mortgage on all assets financed with
the proceeds of the Bonds and is guaranteed by Garmin Corporation.
As of May 1, 2002, Garmin International, Inc. purchased all $9.3 million of
its outstanding 1995 Series Tax-Exempt Industrial Revenue Bonds to further
decrease its long-term debt.
Our reimbursement agreements contain restrictive covenants, which include,
among other things, financial covenants requiring minimum cash flow leverage,
maximum capitalization, minimum tangible net worth, and other affirmative and
negative covenants. We do not expect these limitations to have a material effect
on our business or results of operations. We are in compliance with all
covenants contained in the reimbursement agreements.
During 1999, Garmin Corporation borrowed $18.0 million to finance the
purchase of land and a new manufacturing facility in Shijr, Taiwan. The
remaining debt associated with this facility was retired during the 13-week
period ended March 30, 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 during the year to retire a portion
or all of its long-term debt.
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. We generally have
not been significantly affected by foreign exchange fluctuations because, until
recently, the Taiwan Dollar has proven to be relatively stable. However, within
the last two fiscal years we have experienced significant foreign currency gains
due to the strengthening of the U.S. dollar. The potential of volatile foreign
exchange rate fluctuations in the future could have a significant effect on our
results of operations.
The principal currency involved is the 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 0.5% during 2002 and
resulted in a foreign currency loss of $0.7 million. If the exchange rate
increased by a similar percentage, a comparable foreign currency gain would be
recognized.
Interest Rate Risk
As of March 30, 2002, we have interest rate risk in connection with our
industrial revenue bonds that bear interest at a floating rate. Garmin
International, Inc. entered into two interest rate swap agreements, one on July
1, 2000 ($10.0 million) and another on February 6, 2001 ($5.0 million), 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 $0.9 million is the
amount we would be required to pay to terminate the swap agreements at March 30,
2002. A 10% positive or negative change in the floating counterparty interest
rates associated with the swaps would change the estimated fair value of the
interest rate swap agreements to $0.8 million (positive 10% change) or $0.9
million (negative 10% change), respectively.
The Company's average outstanding debt during the 13-week period ended
March 30, 2002 was approximately $30.8 million. The average interest rate on
debt during the quarter was approximately 4.8%. A 10% positive or negative
change in the average interest rate during the quarter would have resulted in
interest expense of $0.5 million (positive 10% change) or $0.3 million (negative
10% change), respectively. This compares to the actual interest expense of $0.4
million during fiscal 2002.
Part II - Other Information
Item 1. Legal Proceedings
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From time to time the Company may be involved in litigation arising in the
course of its operations. As of May 14,2002, the Company was not a party to any
material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
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None
Item 3. Defaults Upon Senior Securities
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None
Item 4. Submission of Matters to a Vote of Security Holders
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None
Item 5. Other Information
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Not applicable
Item 6. Exhibits and Reports on Form 8-K
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Not applicable
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, 2002