Unassociated Document
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 September 27, 2008

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
(State or other jurisdiction
of incorporation or organization)
98-0229227
(I.R.S. Employer identification no.)
P.O. Box 10670, Grand Cayman KY1-1006
Suite 3206B, 45 Market Street, Gardenia Court
Camana Bay, Cayman Islands
(Address of principal executive offices)
N/A
(Zip Code)

Company's telephone number, including area code: (345) 640-9050

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 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 ¨

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 outstanding of the Company's common shares as of November 3, 2008
Common Shares, $.005 par value: 202,540,334 



Garmin Ltd.
Form 10-Q
Quarter Ended September 27, 2008

Table of Contents

Part I - Financial Information
Page
         
 
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
3
 
         
   
Introductory Comments
3
 
         
   
Condensed Consolidated Balance Sheets at September 27, 2008
   
   
and December 29, 2007
4
 
         
   
Condensed Consolidated Statements of Income for the
   
 
 
13-weeks and 26-weeks ended September 27, 2008 and September 29, 2007
5
 
         
   
Condensed Consolidated Statements of Cash Flows for the
   
   
26-weeks ended September 27, 2008 and September 29, 2007
6
 
         
   
Notes to Condensed Consolidated Financial Statements
7
 
         
 
Item 2.
Management's Discussion and Analysis of
   
   
Financial Condition and Results of Operations
14
 
         
 
Item 3.
Quantitative and Qualitative Disclosures About
   
   
Market Risk
24
 
         
 
Item 4.
Controls and Procedures
25
 
         
Part II - Other Information    
         
 
Item 1.
Legal Proceedings
26
 
         
 
Item 1A.
Risk Factors
27
 
         
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
27
 
         
 
Item 3.
Defaults Upon Senior Securities
28
 
         
 
Item 4.
Submission of Matters to a Vote of Securities Holders
29
 
         
 
Item 5.
Other Information
29
 
         
 
Item 6.
Exhibits
30
 
         
Signature Page
31
 
         
Index to Exhibits
32
 
 
2


Garmin Ltd.
Form 10-Q
Quarter Ended September 27, 2008

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 29, 2007. 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 39-week periods ended September 27, 2008 are not necessarily indicative of the results to be expected for the full year 2008.

3


Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)

 
 
(Unaudited)
 
 
 
 
 
September 27, 
 
December 29,
 
 
 
2008
 
2007
 
Assets
         
Current assets:
         
Cash and cash equivalents
 
$
521,540
 
$
707,689
 
Marketable securities
   
18,048
   
37,551
 
Accounts receivable, net
   
678,750
   
952,513
 
Inventories, net
   
698,927
   
505,467
 
Deferred income taxes
   
87,109
   
107,376
 
Prepaid expenses and other current assets
   
32,204
   
22,179
 
 
         
Total current assets
   
2,036,578
   
2,332,775
 
 
         
Property and equipment, net
   
453,419
   
374,147
 
 
         
Marketable securities
   
309,492
   
386,954
 
Restricted cash
   
1,452
   
1,554
 
Licensing agreements, net
   
6,483
   
14,672
 
Other intangible assets, net
   
207,889
   
181,358
 
 
         
Total assets
 
$
3,015,313
 
$
3,291,460
 
 
         
Liabilities and Stockholders' Equity
         
Current liabilities:
         
Accounts payable
 
$
217,122
 
$
341,053
 
Salaries and benefits payable
   
41,633
   
31,696
 
Accrued warranty costs
   
81,291
   
71,636
 
Other accrued expenses
   
154,102
   
280,603
 
Income taxes payable
   
50,994
   
76,895
 
Dividend payable
   
151,900
   
-
 
 
         
Total current liabilities
   
697,042
   
801,883
 
 
         
Deferred income taxes
   
11,298
   
11,935
 
Non-current taxes
   
166,075
   
126,593
 
Other liabilities
   
1,058
   
435
 
 
         
Stockholders' equity:
         
Common stock, $0.005 par value, 1,000,000,000 shares authorized:
Issued and outstanding shares - 202,533,000 as of September 27, 2008 and 216,980,000 as of December 29, 2007
   
1,511
   
1,086
 
Additional paid-in capital
   
-
   
132,264
 
Retained earnings
   
2,139,214
   
2,171,134
 
Accumulated other comprehensive income/(loss)
   
(885
)
 
46,130
 
 
         
Total stockholders' equity
   
2,139,840
   
2,350,614
 
Total liabilities and stockholders' equity
 
$
3,015,313
 
$
3,291,460
 
 
See accompanying notes
 


 
 
(Unaudited)
 
 
 
 
 
September 27, 
 
December 29,
 
 
   
2008
   
2007
 
Assets
             
Current assets:
             
Cash and cash equivalents
 
$
521,540
 
$
707,689
 
Marketable securities
   
18,048
   
37,551
 
Accounts receivable, net
   
678,750
   
952,513
 
Inventories, net
   
698,927
   
505,467
 
Deferred income taxes
   
87,109
   
107,376
 
Prepaid expenses and other current assets
   
32,204
   
22,179
 
 
             
Total current assets
   
2,036,578
   
2,332,775
 
 
             
Property and equipment, net
   
453,419
   
374,147
 
 
             
Marketable securities
   
309,492
   
386,954
 
Restricted cash
   
1,452
   
1,554
 
Licensing agreements, net
   
6,483
   
14,672
 
Other intangible assets, net
   
207,889
   
181,358
 
 
             
Total assets
 
$
3,015,313
 
$
3,291,460
 
 
             
Liabilities and Stockholders' Equity
             
Current liabilities:
             
Accounts payable
 
$
217,122
 
$
341,053
 
Salaries and benefits payable
   
41,633
   
31,696
 
Accrued warranty costs
   
81,291
   
71,636
 
Other accrued expenses
   
154,102
   
280,603
 
Income taxes payable
   
50,994
   
76,895
 
Dividend payable
   
151,900
   
-
 
 
             
Total current liabilities
   
697,042
   
801,883
 
 
             
Deferred income taxes
   
11,298
   
11,935
 
Non-current taxes
   
166,075
   
126,593
 
Other liabilities
   
1,058
   
435
 
 
             
Stockholders' equity:
             
Common stock, $0.005 par value, 1,000,000,000 shares authorized:
Issued and outstanding shares - 202,533,000 as of September 27, 2008 and 216,980,000 as
of  December 29, 2007
   
1,511
   
1,086
 
Additional paid-in capital
   
-
   
132,264
 
Retained earnings
   
2,139,214
   
2,171,134
 
Accumulated other comprehensive income/(loss)
   
(885
)
 
46,130
 
 
             
Total stockholders' equity
   
2,139,840
   
2,350,614
 
Total liabilities and stockholders' equity
 
$
3,015,313
 
$
3,291,460
 
 
See accompanying notes. 
 

 
4


Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)

 
 
13-Weeks Ended
 
39-Weeks Ended
 
 
 
September 27, 
 
September 29, 
 
September 27, 
 
September 29, 
 
 
 
2008
 
2007
 
2008
 
2007
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
870,355
 
$
728,673
 
$
2,445,830
 
$
1,963,298
 
 
                 
Cost of goods sold
   
484,716
   
386,822
   
1,322,948
   
1,009,028
 
 
                 
Gross profit
   
385,639
   
341,851
   
1,122,882
   
954,270
 
 
                 
Selling, general and administrative expense
   
118,527
   
87,060
   
341,380
   
248,358
 
Research and development expense
   
52,749
   
40,634
   
155,904
   
111,863
 
 
   
171,276
   
127,694
   
497,284
   
360,221
 
 
                 
Operating income
   
214,363
   
214,157
   
625,598
   
594,049
 
 
                 
Other income (expense):
                 
Interest income
   
8,770
   
11,798
   
26,830
   
31,997
 
Foreign currency
   
(12,744
)
 
(3,626
)
 
4,818
   
3,493
 
Gain on sale of equity securities
   
-
   
-
   
50,949
   
-
 
Other
   
1,023
   
297
   
1,824
   
631
 
 
   
(2,951
)
 
8,469
   
84,421
   
36,121
 
 
                 
Income before income taxes
   
211,412
   
222,626
   
710,019
   
630,170
 
 
                 
Income tax provision
   
40,168
   
29,119
   
134,904
   
82,426
 
 
                 
Net income
 
$
171,244
 
$
193,507
 
$
575,115
 
$
547,744
 
 
                 
Net income per share:
                 
Basic
 
$
0.83
 
$
0.89
 
$
2.71
 
$
2.53
 
Diluted
 
$
0.82
 
$
0.88
 
$
2.68
 
$
2.50
 
 
                 
Weighted average common shares outstanding:
                 
Basic
   
206,634
   
216,773
   
212,299
   
216,456
 
Diluted
   
208,107
   
220,644
   
214,252
   
219,482
 
 
See accompanying notes.

5


Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)

 
 
39-Weeks Ended
 
 
 
September 27, 
 
September 29, 
 
 
 
2008
 
2007
 
Operating Activities:
         
Net income
 
$
575,115
 
$
547,744
 
Adjustments to reconcile net income to net cash provided by operating activities:
         
Depreciation
   
33,797
   
22,786
 
Amortization
   
20,823
   
18,803
 
Loss (gain) on sale of property and equipment
   
(243
)
 
71
 
Provision for doubtful accounts
   
4,289
   
3,467
 
Deferred income taxes
   
28,623
   
(1,157
)
Unrealized foreign currency losses
   
11,266
   
3,232
 
Provision for obsolete and slow moving inventories
   
29,439
   
21,502
 
Stock compensation expense
   
28,815
   
8,830
 
Realized gains on marketable securities
   
(50,884
)
 
-
 
Changes in operating assets and liabilities, net of acquisitions:
         
Accounts receivable
   
302,012
   
(90,497
)
Inventories
   
(196,471
)
 
(234,920
)
Other current assets
   
(977
)
 
4,510
 
Accounts payable
   
(175,715
)
 
117,034
 
Other current and non-current liabilities
   
(95,588
)
 
147,608
 
Income taxes payable
   
1,593
   
9,486
 
Purchase of licenses
   
(3,191
)
 
(22,594
)
Net cash provided by operating activities
   
512,703
   
555,905
 
 
         
Investing activities:
         
Purchases of property and equipment
   
(110,480
)
 
(128,893
)
Proceeds from sale of property and equipment
   
8
   
4
 
Purchase of intangible assets
   
(4,061
)
 
(2,481
)
Purchase of marketable securities
   
(366,336
)
 
(983,716
)
Redemption of marketable securities
   
444,102
   
1,141,431
 
Change in restricted cash
   
106
   
(56
)
Acquisitions, net of cash acquired
   
(50,497
)
 
(84,126
)
Net cash used in investing activities
   
(87,158
)
 
(57,837
)
 
         
Financing activities:
         
Proceeds from issuance of common stock
   
7,703
   
15,358
 
Stock repurchase
   
(624,688
)
 
-
 
Dividends
   
-
   
(162,531
)
Payments on long term debt
   
-
   
(218
)
Tax benefit related to stock option exercise
   
2,309
   
15,776
 
Net cash used in financing activities
   
(614,676
)
 
(131,617
)
 
         
Effect of exchange rate changes on cash and cash equivalents
   
2,982
   
(25
)
 
             
Net (decrease)/increase in cash and cash equivalents
   
(186,149
)
 
366,428
 
Cash and cash equivalents at beginning of period
   
707,689
   
337,321
 
Cash and cash equivalents at end of period
 
$
521,540
 
$
703,749
 
 
See accompanying notes.

6

 
Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

September 27, 2008
(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 and 26-week periods ended September 27, 2008 are not necessarily indicative of the results that may be expected for the year ending December 27, 2008.

The condensed consolidated balance sheet at December 29, 2007 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 29, 2007.

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 September 27, 2008 and September 29, 2007 both contain operating results for 13-weeks for both quarter-to-date periods.

2.
Inventories

The components of inventories consist of the following:

 
 
September 27, 2008
 
December 29, 2007
 
 
 
 
 
 
 
Raw Materials
 
$
150,663
 
$
130,056
 
Work-in-process
   
44,968
   
57,622
 
Finished goods
   
531,332
   
343,670
 
Inventory Reserves
   
(28,036
)
 
(25,881
)
Inventory, net of reserves
 
$
698,927
 
$
505,467
 
 
3.
Stock Purchase Plan  

On June 6, 2008 the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to 10,000,000 common shares of Garmin Ltd. and adopted a Rule 10b5-1 plan covering 5,000,000 of such shares. The repurchases may be made from time to time as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The timing and amounts of any repurchases will be determined by the company’s management depending on market conditions and other factors including price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. The share repurchase authorization expires on December 31, 2009. During the third quarter, the Company repurchased 8,158,000 shares using cash of $306,217. There remain approximately 200,000 shares available for repurchase under this authorization given the 1,600,000 purchased in second quarter.

7


4.
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
 
   
September 27, 
 
September 29, 
 
   
2008
 
2007
 
Numerator:
         
Numerator for basic and diluted net income per share - net income
 
$
171,244
 
$
193,507
 
           
Denominator:
         
Denominator for basic net income per share – weighted-average common shares
   
206,634
   
216,773
 
           
Effect of dilutive securities – employee stock options and stock appreciation rights
   
1,473
   
3,871
 
           
Denominator for diluted net income per share – adjusted weighted-average common shares
   
208,107
   
220,644
 
           
Basic net income per share
 
$
0.83
 
$
0.89
 
           
Diluted net income per share
 
$
0.82
 
$
0.88
 
 
   
39-Weeks Ended
 
   
September 27, 
 
September 29, 
 
   
2008
 
2007
 
Numerator:
         
Numerator for basic and diluted net income per share - net income
 
$
575,115
 
$
547,744
 
           
Denominator:
         
Denominator for basic net income per share – weighted-average common shares
   
212,299
   
216,456
 
           
Effect of dilutive securities – employee stock options and stock appreciation rights
   
1,953
   
3,026
 
           
Denominator for diluted net income per share – adjusted weighted-average common shares
   
214,252
   
219,482
 
           
Basic net income per share
 
$
2.71
 
$
2.53
 
           
Diluted net income per share
 
$
2.68
 
$
2.50
 


There were 6,497,596 anti-dilutive options for the 13-week period ended September 27, 2008. There were 13,615 anti-dilutive options for the 13-week period ended September 29, 2007.

  There were 5,655,282 anti-dilutive options for the 39-week period ended September 27, 2008. There were 605,174 anti-dilutive options for the 39-week period ended September 29, 2007.

8


There were 42,109 shares issued as a result of exercises of stock appreciation rights and stock options for the 13-week period ended September 27, 2008.

There were 171,819 shares issued as a result of exercises of stock appreciation rights and stock options for the 39-week period ended September 27, 2008.

On June 6, 2008, the Company’s Board of Directors approved an annual cash dividend of $0.75 per share. The dividend is payable to shareholders of record on December 1, 2008 and will be paid on December 15, 2008.

5.
Comprehensive Income

Comprehensive income is comprised of the following (in thousands):

   
13-Weeks Ended
 
   
September 27, 
 
September 29, 
 
   
2008
 
2007
 
Net income
 
$
171,244
 
$
193,507
 
Translation adjustment
   
(46,610
)
 
9,981
 
Change in fair value of available-for-sale marketable securities, net of deferred taxes
   
(4,144
)
 
1,781
 
Comprehensive income
 
$
120,490
 
$
205,269
 
 
   
39-Weeks Ended
 
   
September 27, 
 
September 29, 
 
   
2008
 
2007
 
Net income
 
$
575,115
 
$
547,744
 
Translation adjustment
   
14,394
   
(555
)
Change in fair value of available-for-sale marketable securities, net of deferred taxes
   
(61,409
)
 
3,061
 
Comprehensive income
 
$
528,100
 
$
550,250
 
 
6.
Segment Information

Net sales, operating income, and income before taxes for each of the Company’s reportable segments are presented below:

9


Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment (Unaudited)

 
 
Reporting Segments
 
 
 
Outdoor/
 
 
 
Auto/
 
 
 
 
 
 
 
Fitness
 
Marine
 
Mobile
 
Aviation
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
13-Weeks Ended September 27, 2008
               
 
                     
Net sales
 
$
118,614
 
$
44,048
 
$
626,506
 
$
81,187
 
$
870,355
 
Gross profit
 
$
74,487
 
$
21,714
 
$
236,339
 
$
53,099
 
$
385,639
 
Operating income
 
$
52,136
 
$
10,606
 
$
124,359
 
$
27,262
 
$
214,363
 
 
                     
13-Weeks Ended September 29, 2007
               
 
                     
Net sales
 
$
87,747
 
$
47,659
 
$
518,939
 
$
74,328
 
$
728,673
 
Gross profit
 
$
46,553
 
$
25,170
 
$
221,148
 
$
48,980
 
$
341,851
 
Operating income
 
$
30,178
 
$
15,623
 
$
141,855
 
$
26,501
 
$
214,157
 
 
                     
39-Weeks Ended September 27, 2008
               
 
                     
Net sales
 
$
308,255
 
$
171,232
 
$
1,710,248
 
$
256,095
 
$
2,445,830
 
Gross profit
 
$
179,834
 
$
94,296
 
$
675,953
 
$
172,799
 
$
1,122,882
 
Operating income
 
$
116,892
 
$
52,510
 
$
361,190
 
$
95,006
 
$
625,598
 
 
                     
39-Weeks Ended September 29, 2007
               
 
                     
Net sales
 
$
225,437
 
$
170,433
 
$
1,343,460
 
$
223,968
 
$
1,963,298
 
Gross profit
 
$
123,616
 
$
92,704
 
$
591,400
 
$
146,550
 
$
954,270
 
Operating income
 
$
79,986
 
$
60,033
 
$
370,448
 
$
83,582
 
$
594,049
 
 
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 long-lived assets (property and equipment) by geographic area are as follows as of and for the 39-week periods ended September 27, 2008 and September 29, 2007:

 
 
North
 
 
 
 
 
 
 
 
 
America
 
Asia
 
Europe
 
Total
 
September 27, 2008
                 
Net sales to external customers
 
$
1,572,042
 
$
108,962
 
$
764,826
 
$
2,445,830
 
Long lived assets
 
$
220,246
 
$
176,194
 
$
56,979
 
$
453,419
 
 
                 
September 29, 2007
                 
Net sales to external customers
 
$
1,231,341
 
$
100,900
 
$
631,057
 
$
1,963,298
 
Long lived assets
 
$
169,828
 
$
143,895
 
$
44,855
 
$
358,578
 
 
7.
Warranty Reserves
 
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.

10

 
 
13-Weeks Ended
 
 
 
Septmber 27,
 
September 29,
 
 
 
2008
 
2007
 
 
 
 
 
 
 
Balance - beginning of the period
 
$
83,918
 
$
49,725
 
Accrual for products sold during the period
   
21,659
   
28,379
 
Expenditures
   
(24,286
)
 
(22,879
)
Balance - end of the period
 
$
81,291
 
$
55,225
 
 
 
 
39-Weeks Ended
 
 
 
Septmber 27,
 
September 29,
 
 
 
2008
 
2007
 
 
 
 
 
 
 
Balance - beginning of the period
 
$
71,636
 
$
37,639
 
Accrual for products sold during the period
   
94,646
   
65,979
 
Expenditures
   
(84,991
)
 
(48,393
)
Balance - end of the period
 
$
81,291
 
$
55,225
 
 
8.
Commitments

Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $47.5 million over the next 3 years.

9.
Income Taxes

Our earnings before taxes decreased 5.0% when compared to the same quarter in 2007, yet our income tax expense increased by $11.1 million, to $40.2 million, for the 13-week period ended September 27, 2008, from $29.1 million for the 13-week period ended September 29, 2007, due to a higher effective tax rate.  The effective tax rate was 19.0% for both the 13-weeks and 39-weeks ended September 27, 2008 compared to13.1% for both the 13-weeks and 39-weeks ended September 29, 2007.   The higher tax rate in 2008 when compared to 2007 was driven by a change in tax law related to the repatriation of earnings from our Taiwan subsidiary and the unfavorable mix of taxable income among Company entities.

10.
Recent Accounting Pronouncements
 
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS No. 157”). SFAS No. 157 establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements. This statement is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company adopted SFAS No. 157 effective December 30, 2007.
 
SFAS No. 157 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). SFAS No. 157 classifies the inputs used to measure fair value into the following hierarchy:
 
Level 1    Unadjusted quoted prices in active markets for identical assets or liability

11

 
Level 2   Unadjusted quoted prices in active markets for similar assets or liabilities, or
 
                                         Unadjusted quoted prices for identical or similar assets
 
Level 3   Unobservable inputs for the asset or liability
 
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.
 
Assets and liabilities measured at estimated fair value on a recurring basis are summarized below:
 
   
Fair Value Measurements as 
 
   
of September 27, 2008
 
   
 Total
 
 Level 1
 
 Level 2
 
 Level 3
 
Description
                         
                           
Available for-sale securites
 
$
244,400
 
$
244,400
   
-
   
-
 
Failed Auction rate securities
   
83,140
   
-
   
-
   
83,140
 
                   
Total
 
$
327,540
 
$
244,400
 
$
-
 
$
83,140
 
 
For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, SFAS No. 157 requires a reconciliation of the beginning and ending balances, separately for each major category of assets. The reconciliation is as follows:
 
   
Fair Value Measurements Using 
 
   
Significant Unobservable Inputs (Level 3)
 
   
13-Weeks Ended
 
39-Weeks Ended
 
   
Sept 27, 2008
 
Sept 27, 2008
 
           
Beginning balance of auction rate securities
 
$
85,469
 
$
0
 
Total unrealized losses included in other comprehensive income
   
(2,329
)
 
(9,710
)
Purchases in and/or out of Level 3
   
-
   
92,850
 
Transfers in and/or out of Level 3
   
-
   
-
 
Ending balance of auction rate securities
 
$
83,140
 
$
83,140
 
 
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). SFAS 160 outlines the accounting and reporting for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent’s ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. The statement is effective for fiscal years beginning on or after December 15, 2008. We do not expect the adoption of SFAS No. 160 to have a material impact on our financial reporting and disclosure.
 
In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). This standard establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. SFAS 141R also establishes disclosure requirements that will enable users to evaluate the nature and financial effects of the business combination. The statement is effective for financial statements issued for fiscal years beginning on or after December 15, 2008 and interim periods within those fiscal years. The Company will determine the impact of adopting SFAS 141R on its consolidated financial statements should applicable transactions occur in the future.

12


In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities (“SFAS No. 161”). This statement will require holders of derivative instruments to provide qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses from derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. This statement is effective for interim and annual periods beginning after November 15, 2008. The company is not currently the holder of any derivative instruments; thus, currently adoption of this statement would not have any effect on the Company’s results of operations, financial condition, or cash flows.

11.
Acquisitions

In the first quarter of 2008, Garmin Ltd. acquired Fairpoint Navigation A/S (the distributor of Garmin’s consumer products in Denmark). The company has been renamed Garmin Danmark A/S.

In the second quarter of 2008, Garmin Ltd. acquired Formar Electronics N.V./S.A. (the distributor of Garmin’s consumer products in Belgium and Luxembourg). The company has been renamed Garmin Belux N.V./S.A.

In the third quarter of 2008, Garmin Ltd. acquired NavCor Oy, the distributor of Garmin’s consumer products in Finland; Puls Elektronik GmbH, the distributor of Garmin’s consumer products in Austria; and Satsignal Equipamentos de Comunicações e de Navegação S.A., the distributor of Garmin’s consumer products in Portugal. NavCor Oy has been renamed Garmin Suomi Oy. Puls Elektronik GmbH has been renamed Garmin Austria GmbH.

In aggregate, these acquisitions are not considered to be material; therefore supplemental pro forma information is not presented.

12.
Subsequent Events

On October 3, 2008, Garmin Ltd. announced its intent to acquire Sportsmanship International AB, the distributor of Garmin’s consumer products in Sweden. This acquisition is not expected to be material.

On October 22, 2008, the Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $300 million of the common shares of Garmin Ltd. This repurchase is in addition to outstanding shares under the June 2008 plan described in Note 3. The repurchases may be made from time to time as market and business conditions warrant on the open market or in negotiated transactions in compliance with the SEC’s Rule 10b-18. The timing and amounts of any repurchases will be determined by the company’s management depending on market conditions and other factors including price, regulatory requirements and capital availability. The program does not require the purchase of any minimum number of shares and may be suspended or discontinued at any time. The share repurchase authorization expires on December 31, 2009.

13


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, 2007. 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, 2007.

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 four 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 four segments may vary significantly. As such, the segments are managed separately.

14


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
 
 
 
September 27, 2008
 
September 29, 2007
 
Net sales
   
100.0
%
 
100.0
%
Cost of goods sold
   
55.7
%
 
53.1
%
Gross profit
   
44.3
%
 
46.9
%
Research and development
   
6.1
%
 
5.6
%
Selling, general and administrative
   
13.6
%
 
11.9
%
Total operating expenses
   
19.7
%
 
17.5
%
Operating income
   
24.6
%
 
29.4
%
Other income (expense), net
   
-0.3
%
 
1.2
%
Income before income taxes
   
24.3
%
 
30.6
%
Provision for income taxes
   
4.6
%
 
4.0
%
Net income
   
19.7
%
 
26.6
%
 
   
39-Weeks Ended
 
 
 
September 27, 2008
 
September 29, 2007
 
Net sales
   
100.0
%
 
100.0
%
Cost of goods sold
   
54.1
%
 
51.4
%
Gross profit
   
45.9
%
 
48.6
%
Research and development
   
6.3
%
 
5.7
%
Selling, general and administrative
   
14.0
%
 
12.6
%
Total operating expenses
   
20.3
%
 
18.3
%
Operating income
   
25.6
%
 
30.3
%
Other income (expense), net
   
3.6
%
 
1.8
%
Income before income taxes
   
29.0
%
 
32.1
%
Provision for income taxes
   
5.5
%
 
4.2
%
Net income
   
23.5
%
 
27.9
%
 
The company manages its operations in four 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, gross profit, and operating profit for each of our four 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.

15

 

Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment (Unaudited)
 
 
 
Reporting Segments
 
 
 
Outdoor/
 
 
 
Auto/
 
 
 
 
 
 
 
Fitness
 
Marine
 
Mobile
 
Aviation
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
13-Weeks Ended September 27, 2008 
                               
 
   
   
   
   
   
 
Net sales
 
$
118,614
 
$
44,048
 
$
626,506
 
$
81,187
 
$
870,355
 
Gross profit
 
$
74,487
 
$
21,714
 
$
236,339
 
$
53,099
 
$
385,639
 
Operating income
 
$
52,136
 
$
10,606
 
$
124,359
 
$
27,262
 
$
214,363
 
 
   
   
   
   
   
 
13-Weeks Ended September 29, 2007 
                               
 
   
   
   
   
   
 
Net sales
 
$
87,747
 
$
47,659
 
$
518,939
 
$
74,328
 
$
728,673
 
Gross profit
 
$
46,553
 
$
25,170
 
$
221,148
 
$
48,980
 
$
341,851
 
Operating income
 
$
30,178
 
$
15,623
 
$
141,855
 
$
26,501
 
$
214,157
 
 
   
   
   
   
   
 
39-Weeks Ended September 27, 2008 
                               
 
   
   
   
   
   
 
Net sales
 
$
308,255
 
$
171,232
 
$
1,710,248
 
$
256,095
 
$
2,445,830
 
Gross profit
 
$
179,834
 
$
94,296
 
$
675,953
 
$
172,799
 
$
1,122,882
 
Operating income
 
$
116,892
 
$
52,510
 
$
361,190
 
$
95,006
 
$
625,598
 
 
   
   
   
   
   
 
39-Weeks Ended September 29, 2007 
                               
 
   
   
   
   
   
 
Net sales
 
$
225,437
 
$
170,433
 
$
1,343,460
 
$
223,968
 
$
1,963,298
 
Gross profit
 
$
123,616
 
$
92,704
 
$
591,400
 
$
146,550
 
$
954,270
 
Operating income
 
$
79,986
 
$
60,033
 
$
370,448
 
$
83,582
 
$
594,049
 

16

 
Comparison of 13-Weeks Ended September 27, 2008 and September 29, 2007

Net Sales

 
 
13-weeks ended September 27, 2008
 
13-weeks ended September 29, 2007
 
Quarter over Quarter 
 
 
 
Net Sales
 
% of Revenues
 
Net Sales
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
118,614
   
13.6
%  
$
87,747
   
12.1
%  
$
30,867
   
35.2
%
Marine
   
44,048
   
5.1
%
 
47,659
   
6.5
%
 
(3,611
)
 
-7.6
%
Automotive/Mobile
   
626,506
   
72.0
%
 
518,939
   
71.2
%
 
107,567
   
20.7
%
Aviation
   
81,187
   
9.3
%
 
74,328
   
10.2
%
 
6,859
   
9.2
%
Total
 
$
870,355
   
100.0
%
$
728,673
   
100.0
%
$
141,682
   
19.4
%

Increases in sales for the 13-week period ended September 27, 2008 were primarily due to growth in our automotive and outdoor/fitness segments. Aviation revenues also grew but marine revenues declined on a year-over-year basis. Automotive/mobile revenue remains a significantly larger portion of our revenue mix, rising from 71.2% in the third quarter of 2007 to 72.0% in the third quarter of 2008.

Total unit sales increased 43% to 3,855,000 in the third quarter of 2008 from 2,688,000 in the third quarter of 2007. The higher unit sales volume in the third quarter of fiscal 2008 was primarily attributable to ongoing growth in demand for automotive products, although unit growth was also strong in the outdoor/fitness segment due to the strong product line-up.

Automotive/mobile segment revenue grew 20.7% from the year-ago quarter, on the strength of the nüvi series of personal navigation devices (PNDs). Revenues in our outdoor/fitness segment grew the fastest due to the strong product line-up including the Oregon™ series, the Forerunner® 405 and Edge® 705 along with a stable average selling price. Our aviation segment grew 9.2% from the year ago quarter. Growth in this segment is primarily driven by the demand for the G1000 in the OEM market. The marine segment continued to slow during the quarter when compared with the third quarter of 2007. The decline is primarily related to less consumer spending in the marine industry due to macroeconomic conditions and fuel prices.
 
Gross Profit

 
 
13-weeks ended September 27, 2008
 
13-weeks ended September 29, 2007
 
Quarter over Quarter
 
 
 
Gross Profit
 
% of Revenues
 
Gross Profit
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
74,487
   
62.8
%  
$
46,553
   
53.1
%  
$
27,934
   
60.0
%
Marine
 
$
21,714
   
49.3
%
 
25,170
   
52.8
%
 
(3,456
)
 
-13.7
%
Automotive/Mobile
 
$
236,339
   
37.7
%
 
221,148
   
42.6
%
 
15,191
   
6.9
%
Aviation
 
$
53,099
   
65.4
%
 
48,980
   
65.9
%
 
4,119
   
8.4
%
Total
 
$
385,639
   
44.3
%
$
341,851
   
46.9
%
$
43,788
   
12.8
%
 
Gross profit dollars in the third quarter of 2008 grew 12.8% while gross profit margin percentage decreased 260 basis points over the third quarter of 2007. Third quarter gross profit margin increased to 62.8% in the outdoor/fitness segment when compared to the third quarter of 2007. Third quarter 2008 gross profit margins decreased to 49.3%, 37.7%, and 65.4% in the marine, automotive/mobile, and aviation segments respectively, when compared with the third quarter of 2007.

Gross profit margin percentage for the Company overall decreased primarily as a result of the automotive/mobile segment remaining a significantly larger percentage of the Company’s product mix during a quarter when this segment’s margin fell by 490 basis points. The automotive/mobile segment is by nature a lower-margin business and the Company has begun to see the impacts expected on gross margin due to falling prices and a product mix shift toward lower end PNDs. Foreign currency fluctuations resulted in 125 basis points of gross margin compression due to sales transacted in foreign currencies. A newer suite of products in the outdoor/fitness segment drove strong year-over-year improvement in outdoor/fitness margins. Declines in gross margin in the marine segment occurred due to reduced volumes and product mix shift toward lower margin products. The aviation segment saw a 50 basis point decrease in gross margin due to changes in our warranty programs. Aviation continued to be the Company’s highest gross margin segment.
 
17


Selling, General and Administrative Expenses

 
 
13-weeks ended September 27, 2008
 
13-weeks ended September 29, 2007
 
 
 
 
 
Selling, General &
 
 
 
Selling, General &
 
 
 
Quarter over Quarter 
 
 
 
Admin. Expenses
 
% of Revenues
 
Admin. Expenses
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
15,868
   
13.4
%  
$
11,468
   
13.1
%  
$
4,400
   
38.4
%
Marine
 
$
6,175
   
14.0
%
 
5,635
   
11.8
%
 
540
   
9.6
%
Automotive/Mobile
 
$
90,256
   
14.4
%
 
63,988
   
12.3
%
 
26,268
   
41.1
%
Aviation
 
$
6,228
   
7.7
%
 
5,969
   
8.0
%
 
259
   
4.3
%
Total
 
$
118,527
   
13.6
%
$
87,060
   
11.9
%
$
31,467
   
36.1
%

The increase in selling, general and administrative expense was driven primarily by costs associated with the European distributors acquired in 2007 and 2008, increased staffing throughout the organization to support our growth and increased advertising spending. Selling, general and administrative expenses excluding advertising increased as a percent of sales from 6.6% of sales in the third quarter of 2007 to 7.8% of sales in the third quarter of 2008. In absolute dollars, selling, general and administrative expenses excluding advertising increased $19.4 million when compared to the previous year quarter, with increases distributed across European distributors, call center, information technology, operations, finance, human resources, administration, and marketing administration areas to support the growth of our businesses. Advertising spending increased $12.1 million and 50 basis points as a percent of sales from 5.3% in third quarter 2007 to 5.8% in third quarter 2008.

Research and Development Expense

 
 
13-weeks ended September 27, 2008
 
13-weeks ended September 29, 2007
 
 
 
 
 
Research &
 
 
 
Research &
 
 
 
Quarter over Quarter 
 
 
 
Development
 
% of Revenues
 
Development
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
6,483
   
5.5
%  
$
4,907
   
5.6
%  
$
1,576
   
32.1
%
Marine
   
4,932
   
11.2
%
 
3,912
   
8.2
%
 
1,020
   
26.1
%
Automotive/Mobile
   
21,724
   
3.5
%
 
15,305
   
2.9
%
 
6,419
   
41.9
%
Aviation
   
19,610
   
24.2
%
 
16,510
   
22.2
%
 
3,100
   
18.8
%
Total
 
$
52,749
   
6.1
%
$
40,634
   
5.6
%
$
12,115
   
29.8
%
 
The 29.8% increase in research and development expense was due to ongoing development activities for new products, the addition of over 400 new engineering personnel to our staff since the same period last year, and an increase in engineering program costs during the third quarter of 2008 as a result of our continued emphasis on product innovation. Research and development costs increased $12.1 million when compared with the third quarter of 2007 representing a 50 basis point increase as a percent of revenue.
 
Operating Income

 
 
13-weeks ended September 27, 2008
 
13-weeks ended September 29, 2007
 
Quarter over Quarter 
 
 
 
Operating Income
 
% of Revenues
 
Operating Income
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
52,136
   
44.0
%  
$
30,178
   
34.4
%  
$
21,958
   
72.8
%
Marine
   
10,606 
   
24.1
%
 
15,623 
   
32.8
%
 
(5,017
)
 
-32.1
%
Automotive/Mobile
   
124,359
   
19.8
%
 
141,855
   
27.3
%
 
(17,496
)
 
-12.3
%
Aviation
   
27,262
   
33.6
%
 
26,501
   
35.7
%
 
761
   
2.9
%
Total
 
$
214,363
   
24.6
%
$
214,157
   
29.4
%
$
206
   
0.1
%

Operating margin declined 480 basis points as a percent of revenue when compared to the third quarter of 2007 due to the decrease in gross margins, along with the costs associated with the European distributors, increases in staffing to support the growth of our businesses, increases in advertising, and research and development expense associated with ongoing development activities. Operating margin increased to 44.0% within our outdoor/fitness segment when compared with the third quarter of 2007. Operating margins decreased to 19.8%, 24.1% and 33.6% within our automotive/mobile, marine, and aviation segments, respectively, when compared with the third quarter of 2007. Our operating income was basically flat as increases in the outdoor/fitness and aviation segments offset declining margins in automotive/mobile and marine.

18


Other Income (Expense)

 
 
13-weeks ended
 
13-weeks ended
 
 
 
September 27, 2008
 
September 29, 2007
 
Interest Income
 
$
8,770
 
$
11,798
 
Foreign Currency Exchange
   
(12,744
)
 
(3,626
)
Gain on sale of equity securities
   
0
   
-
 
Other
   
1,023
   
297
 
Total
  $
(2,951
$
8,469
 

The average interest rate of return on cash and investments during the third quarter of 2008 was 3.8% compared to 4.5% during the same quarter of 2007. The decrease in interest income is attributable to slightly lower cash balances and decreasing interest rates.

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar (TD), the Euro, and the British Pound Sterling. The U.S. Dollar (USD) remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of Garmin France, Garmin Deutschland, Garmin Iberia, Garmin Italia, Garmin Belux, Garmin Suomi Oy, Garmin Austria GmbH and Satsignal Equipamentos de Comunicações e de Navegação S.A.. As these entities grow, Euro currency moves will generate material gains and losses. Additionally, Euro-based inter-company transactions can also generate currency gains and losses. The Canadian dollar and Danish Krone are the functional currency of Dynastream Innovations, Inc. and Garmin Danmark, respectively; due to these entities’ relative size, currency moves are not expected to have a material impact on the Company’s financial statements.

The majority of the $12.7 million currency loss in the third quarter of 2008 was due to the strengthening of the USD. During the third quarter of fiscal 2008, the TD weakened 5.0% in comparison to the USD, resulting in a $38.5 million gain. Offsetting this impact, the Euro has weakened 6.5% relative to the USD resulting in a $51.2 million loss. The weakness of the TD and Euro have offsetting impacts due to the use of the TD for manufacturing cost while the Euro transactions relate to revenue.

The majority of the $3.6 million currency loss in the third quarter of 2007 was due to the weakening of the USD compared to the TD. During the third quarter of fiscal 2007 the exchange rate increased resulting in a $5.4 million loss. The British Pound Sterling and the Euro strengthened 1.5% and 4.9% respectively relative to the USD during the quarter which resulted in a $0.4 million gain related to movements in the British Pound Sterling and a $1.2 million gain related to movements in the Euro. Other net currency gains and the timing of transactions created the remaining gain of $0.2 million.
 
Income Tax Provision
 
Our earnings before taxes fell 5% when compared to the third quarter of 2007, yet our income tax expense increased by $11.0 million, to $40.2 million, for the 13-week period ended September 27, 2008, from $29.1 million for the 13-week period ended September 29, 2007, due to a higher effective tax rate.  The effective tax rate was 19.0% in the third quarter of 2008 and 13.1% in the third quarter of 2007.    The higher tax rate in the third quarter of 2008 when compared to the same quarter in 2007 was driven by a change in tax law related to the repatriation of earnings from our Taiwan subsidiary and the unfavorable mix of taxable income among Company entities.

Net Income

As a result of the above, net income decreased 11.5% for the 13-week period ended September 27, 2008 to $171.2 million compared to $193.5 million for the 13-week period ended September 29, 2007.

19


Comparison of 39-Weeks Ended September 27, 2008 and September 29, 2007

Net Sales

 
 
39-weeks ended September 27, 2008
 
39-weeks ended September 29, 2007
 
Quarter over Quarter
 
 
 
Net Sales
 
% of Revenues
 
Net Sales
 
% of Revenues
 
$ Change
 
% Change
 
Outdoor/Fitness
 
$
308,255
   
12.6
%  
$
225,437
   
11.5
%  
$
82,818
   
36.7
%
Marine
   
171,232
   
7.0
%
 
170,433
   
8.7
%
 
799
   
0.5
%
Automotive/Mobile
   
1,710,248
   
69.9
%
 
1,343,460