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Garmin Ltd. and Subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

March 28, 2009

(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 28, 2009 are not necessarily indicative of the results that may be expected for the year ending December 26, 2009.

The condensed consolidated balance sheet at December 27, 2008 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 27, 2008.

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 28, 2009 and March 29, 2008 both contain operating results for 13-weeks for both year-to-date periods.

2.	Inventories

The components of inventories consist of the following:

 

		March 28, 2009				December 27, 2008
Raw Materials		$	137,491			$	151,132
Work-in-process			34,890				28,759
Finished goods			208,684				268,625
Inventory Reserves			(27,533	)			(23,204	)
Inventory, net of reserves		$	353,532			$	425,312

 

3.	Share Repurchase Plan

The Board of Directors approved a share repurchase program on October 22, 2008, authorizing the Company to purchase up to $300,000 of its common shares as market and business conditions warrant.   The share repurchase authorization expires on December 31, 2009.   In the quarter ended March 28, 2009, the Company repurchased 117,600 shares using cash of $1,849.  There remains approximately $256,000 available for repurchase under this authorization given the $42,000 of purchases in fiscal 2008.

 

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4.	Earnings Per Share

The following table sets forth the computation of basic and diluted net income per share:

 

		13-Weeks Ended
		March 28,				March 29,
		2009				2008
Numerator:
Numerator for basic and diluted net income
per share - net income		$	48,538			$	147,779
Denominator:
Denominator for basic net income per share –
weighted-average common shares			200,352				216,505
Effect of dilutive securities –
employee stock options			373				2,474
Denominator for diluted net income per share –
adjusted weighted-average common shares			200,725				218,979
Basic net income per share		$	0.24			$	0.68
Diluted net income per share		$	0.24			$	0.67

There were 9,488,615 anti-dilutive options for the 13-week period ended March 28, 2009.   There were 3,107,431 anti-dilutive options for the 13-week period ended March 29, 2008.

There were 12,098 shares issued as a result of exercises of stock appreciation rights and stock options for the 13-week period ended March 28, 2009.

 

5.	Comprehensive Income

Comprehensive income is comprised of the following:

		13-Weeks Ended
		March 28,				March 29,
		2009				2008
Net income		$	48,538			$	147,779
Translation adjustment			(18,763	)			79,794
Change in fair value of available-for-sale
marketable securities, net of deferred taxes			(6,042	)			(32,974	)
Comprehensive income		$	23,733			$	194,599

 

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6.	Segment Information

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

 

			Reportable Segments
			Outdoor/								Auto/
			Fitness				Marine				Mobile				Aviation				Total
13-Weeks Ended	March 28, 2009
Net sales			$	80,004			$	38,017			$	259,586			$	59,092			$	436,699
Operating income			$	28,505			$	10,572			$	4,605			$	14,277			$	57,959
Income before taxes			$	27,660			$	9,723			$	9,158			$	13,383			$	59,924
13-Weeks Ended	March 29, 2008
Net sales			$	70,495			$	56,006			$	451,859			$	85,445			$	663,805
Operating income			$	19,311			$	17,836			$	107,641			$	27,944			$	172,732
Income before taxes			$	20,447			$	19,333			$	112,304			$	30,359			$	182,443

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 13-week periods ended March 28, 2009 and March 29, 2008:

 

		North
		America				Asia				Europe				Total
March 28, 2009
Net sales to external customers		$	264,777			$	28,140			$	143,782			$	436,699
Long lived assets		$	226,384			$	160,087			$	54,140			$	440,611
March 29, 2008
Net sales to external customers		$	411,432			$	41,786			$	210,587			$	663,805
Long lived assets		$	195,784			$	150,324			$	45,893			$	392,001

 

7.	Warranty Reserves

 

The Company’s products sold are generally covered by a warranty for periods ranging from one to two years.   The Company’s estimate of costs to service its warranty obligations are based on historical experience and expectation of future conditions and are recorded as a liability on the balance sheet.   The following reconciliation provides an illustration of changes in the aggregate warranty reserve.

 

		13-Weeks Ended
		March 28,				March 29,
		2009				2008
Balance - beginning of the period		$	87,408			$	71,636
Accrual for products sold
during the period			23,993				35,321
Expenditures			(42,554	)			(34,206	)
Balance - end of the period		$	68,847			$	72,751

 

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8.	Commitments

Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $37,200 over the next 5 years.

9.	Income Taxes

Our earnings before taxes decreased 67% when compared to the same quarter in 2008, and our income tax expense decreased by $23,278, to $11,386 for the 13-week period ended March 28, 2009, from $34,664 for the 13-week period ended March 29, 2008.  The effective tax rate was 19.0% in the first quarter of 2009 and the first quarter of 2008.

 

10.	Fair Value Measurements

 

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. 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
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 March 28, 2009
Description		Total				Level 1				Level 2				Level 3
Available for-sale securites		$	253,839			$	253,839				-				-
Failed Auction rate securities			65,544				-				-				65,544
Total		$	319,383			$	253,839			$	-			$	65,544

 

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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
			Mar 28, 2009
Beginning balance of auction rate securities		$	71,303
Total unrealized losses included in other
comprehensive income			(5,759)
Purchases in and/or out of Level 3			-
Transfers in and/or out of Level 3			-
Ending balance of auction rate securities		$	65,544

 

11.	Recently Issued Accounting Pronouncements

 

In May 2008, the FASB issued EITF 07-1, Accounting for Collaborative Arrangements.  EITF Issue 07-1 requires entities entering into collaborative arrangements in which two or more parties actively participate in a joint operating activity and are exposed to significant risks and rewards that depend on the commercial success of the joint operating activity to make specific disclosures regarding that arrangement.  Garmin announced a strategic alliance with ASUSTeK Computer Inc. on February 4, 2009 that will leverage the companies’ navigation and mobile telephony expertise to design, manufacture and distribute co-branded location-centric mobile phones.  The mobile phone product line will be known as the Garmin-Asus nüvifone series.  The Company has adopted EITF Issue 07-1 and the strategic alliance did not have a material impact on the Company’s financial condition or operating results in the first quarter of 2009.

In April 2009, the FASB released FASB Staff Position (FSP) SFAS 107-1 and Accounting Principles Board (APB) Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (SFAS 107-1 and APB 28-1).  This FSP amends FASB Statement No. 107, “Disclosures about Fair Values of Financial Instruments,” to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements.  The FSP also amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in all interim financial statements.  This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt SFAS 107-1 and APB 28-1 and provide the additional disclosure requirements for second quarter 2009.

In April 2009, the FASB released FASB Staff Position SFAS 157-4, “Determining Whether a Market Is Not Active and a Transaction Is Not Distressed” (SFAS 157-4).  This FSP provides additional guidance in determining whether a market for a financial asset is not active and a transaction is not distressed for fair value measurement purposes as defined in SFAS 157, “Fair Value Measurements.”  SFAS 157-4 is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of SFAS 157-4 during second quarter 2009, but does not believe this guidance will have a significant impact on the Company’s financial position, cash flows, or disclosures.

In April 2009, the FASB issued FASB Staff Position SFAS 115-2 and SFAS 124-2 “Recognition and Presentation of Other-Than-Temporary Impairments.”  This FSP provides guidance in determining whether impairments in debt securities are other than temporary, and modifies the presentation and disclosures surrounding such instruments.  This FSP is effective for interim periods ending after June 15, 2009, but early adoption is permitted for interim periods ending after March 15, 2009.  The Company plans to adopt the provisions of this Proposed Staff Position during second quarter 2009, but does not believe this guidance will have a significant impact on the Company’s financial position, cash flows, or disclosures.

 

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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 27, 2008.  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 27, 2008.

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.

 

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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 28, 2009				March 29, 2008
Net sales			100.0	%			100.0	%
Cost of goods sold			55.1	%			51.8	%
Gross profit			44.9	%			48.2	%
Advertising			5.3	%			5.7	%
Selling, general and administrative			13.7	%			9.0	%
Research and development			12.6	%			7.5	%
Total operating expenses			31.6	%			22.2	%
Operating income			13.3	%			26.0	%
Other income (expense), net			0.4	%			1.5	%
Income before income taxes			13.7	%			27.5	%
Provision for income taxes			2.6	%			5.2	%
Net income			11.1	%			22.3	%

 

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 (net sales), gross profit, and operating income 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.

 

			Reportable Segments
			Outdoor/								Auto/
			Fitness				Marine				Mobile				Aviation				Total
13-Weeks Ended	March 28, 2009
Net sales			$	80,004			$	38,017			$	259,586			$	59,092			$	436,699
Operating income			$	28,505			$	10,572			$	4,605			$	14,277			$	57,959
Income before taxes			$	27,660			$	9,723			$	9,158			$	13,383			$	59,924
13-Weeks Ended	March 29, 2008
Net sales			$	70,495			$	56,006			$	451,859			$	85,445			$	663,805
Operating income			$	19,311			$	17,836			$	107,641			$	27,944			$	172,732
Income before taxes			$	20,447			$	19,333			$	112,304			$	30,359			$	182,443

 

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Comparison of 13-Weeks Ended March 28, 2009 and March 29, 2008

(Amounts included in the following discussion are stated in thousands unless otherwise indicated)

Net Sales

 

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008								Quarter over Quarter
		Net Sales				% of Revenues				Net Sales				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	80,004				18.3	%		$	70,495				10.6	%		$	9,509				13.5	%
Marine			38,017				8.7	%			56,006				8.4	%			(17,989	)			-32.1	%
Automotive/Mobile			259,586				59.5	%			451,859				68.1	%			(192,273	)			-42.6	%
Aviation			59,092				13.5	%			85,445				12.9	%			(26,353	)			-30.8	%
Total		$	436,699				100.0	%		$	663,805				100.0	%		$	(227,106	)			-34.2	%

Net sales decreased 34.2% for the 13-week period ended March 28, 2009 when compared to the year-ago quarter.  The decline was driven by the automotive/mobile segment, as well as aviation and marine.  These declines were partially offset by a 13.5% increase in outdoor/fitness.  Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 68.1% in the first quarter of 2008 to 59.5% in the first quarter of 2009.

Total unit sales decreased 13% to 2,416,000 in the first quarter of 2009 from 2,787,000 in the same period of 2008.   The lower unit sales volume in the first quarter of fiscal 2009 was attributable to declining volumes in automotive, aviation and marine products offset by unit growth in the outdoor/fitness segment.

Automotive/mobile segment revenue declined the most during the quarter, down 43% from the year-ago quarter, as the average selling price declined due to price protection credits offered to our retail partners and retailers significantly reduced inventory levels.  This segment is also being slowed due to global macroeconomic conditions which have impacted all geographies.  The aviation and marine segments declined 31% and 32%, respectively, from the year-ago quarter as both industries experience significant slowdowns associated with the macroeconomic conditions.  Revenues in our outdoor/fitness segment grew relative to the first quarter of 2008 due to ongoing channel penetration and market share gains of our fitness products.

Gross Profit

 

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008								Quarter over Quarter
		Gross Profit				% of Revenues				Gross Profit				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	48,424				60.5	%		$	37,439				53.1	%		$	10,985				29.3	%
Marine		$	22,878				60.2	%			32,463				58.0	%			(9,585	)			-29.5	%
Automotive/Mobile		$	84,183				32.4	%			195,894				43.4	%			(111,711	)			-57.0	%
Aviation		$	40,510				68.6	%			54,319				63.6	%			(13,809	)			-25.4	%
Total		$	195,995				44.9	%		$	320,115				48.2	%		$	(124,120	)			-38.8	%

Gross profit dollars in the first quarter of 2009 fell 38.8% and gross profit margin fell 330 basis points compared to the first quarter of 2008.  First quarter gross profit margins decreased to 32.4% from 43.4% in the automotive/mobile segment, when compared to the same quarter in 2008.   First quarter 2009 gross profit margins increased in the outdoor/fitness, aviation and marine segments when compared with the first quarter of 2008.

Gross profit margin percentage for the Company overall fell as a result of the margin decline in the automotive/mobile segment.   The automotive/mobile segment’s margin fell 11% as the average selling price decline was only partially offset by per unit cost reductions.  The impact to total company gross margin of the automotive/mobile segment declined as it fell to 43.0% of total gross margin from 61.2% in the year-ago quarter.  The Company benefited from increased margins in the outdoor/fitness, aviation and marine segments due to stable pricing and decreases in per unit costs.  Gross margins were most improved in the outdoor/fitness segment which saw an increase of 740 basis points from the year ago quarter, as pricing increased following the promotional holiday period.  Aviation and marine gross margins increased 500 basis points and 220 basis points, respectively, from the year-ago quarter.

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Advertising Expense

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008								Quarter over Quarter
		Advertising				% of Revenues				Advertising				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	2,698				3.4	%		$	4,969				7.0	%		$	(2,271	)			-45.7	%
Marine		$	1,745				4.6	%			4,108				7.3	%			(2,363	)			-57.5	%
Automotive/Mobile		$	17,662				6.8	%			27,977				6.2	%			(10,315	)			-36.9	%
Aviation		$	1,120				1.9	%			1,075				1.3	%			45				4.2	%
Total		$	23,225				5.3	%		$	38,129				5.7	%		$	(14,904	)			-39.1	%

 

Advertising expense decreased both as a percentage of sales and in absolute dollars when compared with the year-ago period.  As a percent of sales, advertising expenses declined to 5.3% in the first quarter of 2009 compared to 5.7% in first quarter of 2008.  The decrease was a result of actions taken by the Company to reduce costs as the macroeconomic conditions impacted sales across our segments and around the world.

 

Selling, General and Administrative Expense

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008								Quarter over Quarter
		Selling, General & Admin. Expenses				% of Revenues				Selling, General & Admin. Expenses				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	11,396				14.2	%		$	6,961				9.9	%		$	4,435				63.7	%
Marine		$	5,382				14.2	%			5,163				9.2	%			219				4.2	%
Automotive/Mobile		$	37,036				14.3	%			41,052				9.1	%			(4,016	)			-9.8	%
Aviation		$	5,963				10.1	%			6,520				7.6	%			(557	)			-8.5	%
Total		$	59,777				13.7	%		$	59,696				9.0	%		$	81				0.1	%

Selling, general and administrative expense was flat in absolute dollars compared to the year-ago quarter as costs throughout the Company were held steady.  As a percent of sales, selling, general and administrative expenses increased from 9.0% of sales in the first quarter of 2008 to 13.7% of sales in the first quarter of 2009, as revenues declined.

Research and Development Expense

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008
		Research &								Research &								Quarter over Quarter
		Development				% of Revenues				Development				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	5,826				7.3	%		$	6,198				8.8	%		$	(372	)			-6.0	%
Marine			5,179				13.6	%			5,356				9.6	%			(177	)			-3.3	%
Automotive/Mobile			24,880				9.6	%			19,223				4.3	%			5,657				29.4	%
Aviation			19,149				32.4	%			18,781				22.0	%			368				2.0	%
Total		$	55,034				12.6	%		$	49,558				7.5	%		$	5,476				11.0	%

The 11.0% increase in research and development expense was due to ongoing development activities for new products and the addition of almost 350 new engineering personnel to our staff since the year-ago quarter as a result of our continued emphasis on product innovation.   Research and development costs increased $5.5 million when compared with the year-ago quarter representing a 510 basis point increase as a percent of revenue, due to the 34% revenue decline.

 

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Operating Income

		13-weeks ended March 28, 2009								13-weeks ended March 29, 2008								Quarter over Quarter
		Operating Income				% of Revenues				Operating Income				% of Revenues				$ Change				% Change
Outdoor/Fitness		$	28,505				35.6	%		$	19,311				27.4	%		$	9,194				47.6	%
Marine			10,572				27.8	%			17,836				31.8	%			(7,264	)			-40.7	%
Automotive/Mobile			4,605				1.8	%			107,641				23.8	%			(103,036	)			-95.7	%
Aviation			14,277				24.2	%			27,944				32.7	%			(13,667	)			-48.9	%
Total		$	57,959				13.3	%		$	172,732				26.0	%		$	(114,773	)			-66.4	%

Operating income was down 1270 basis points as a percent of revenue when compared to the first quarter of 2008 due to declining revenues and the resulting impact on gross margins and continued growth in research and development expense associated with ongoing development activities.   Operating margins decreased to 27.8%, 1.8%, and 24.2% within our marine, automotive/mobile and aviation segments, respectively, when compared with the first quarter in 2008.   Operating margins increased to 35.6% within our outdoor/fitness segment.  Management expects margins in the automotive/mobile segment to increase sequentially as pricing and volumes increase in the second quarter of 2009.

Other Income (Expense)

 

		13-weeks ended				13-weeks ended
		March 28, 2009				March 29, 2008
Interest Income		$	5,097			$	8,327
Foreign Currency Exchange			(2,438	)			(3,999	)
Other			(694	)			5,383
Total		$	1,965			$	9,711

 

The average interest rate return on cash and investments during the first quarter of 2009 was 1.8% compared to 2.9% during the same quarter of 2008.  The decrease in interest income is attributable to decreasing interest rates.

Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling.   The U.S. Dollar remains the functional currency of Garmin (Europe) Ltd.  The Euro is the functional currency of all other European subsidiaries excluding Garmin Danmark and Garmin Sweden.  As these entities have grown, Euro currency moves generate material gains and losses.   Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses.  The Canadian Dollar and Danish Krone, and Swedish Krona are the functional currency of Dynastream Innovations, Inc., Garmin Danmark, and Garmin Sweden 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 $2.4 million currency loss in the first quarter of 2009 was due to the strengthening of the U.S. Dollar compared to the Euro, the British Pound Sterling, and the Taiwan Dollar.  The relative strength of the Taiwan Dollar and Euro have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs while the Euro transactions relate to revenue.  During the first quarter of 2009, the U.S. Dollar strengthened 4.3% and 2.3%, respectively, compared to the Euro and the British Pound Sterling, resulting in a loss of $13.6 million.  Offsetting this loss was a gain of $11.1 million due to the U.S. Dollar strengthening 2.1% against the Taiwan Dollar.  The remaining net currency gain of $0.1 million related to other currencies and timing of transactions.

The majority of the $4.0 million currency loss in the first quarter of 2008 was due to the weakening of the U.S. Dollar compared to the Taiwan Dollar.   During the first quarter of fiscal 2008 the Taiwan Dollar exchange rate increased 6.4% in comparison to the USD, resulting in a $43.7 million loss. Offsetting this impact, the Euro has strengthened 7.6% relative to the U.S. Dollar during the first quarter which resulted in a $39.9 million gain. The relative strength of the Taiwan Dollar and Euro have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs while the Euro transactions relate to revenue. Other net currency gains and the timing of transactions created the remaining loss of $0.2 million.

 

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Other income of $5.4 million in the first quarter of 2008 was primarily generated from the sale of a portion of our equity interest in Tele Atlas N.V.

Income Tax Provision

 

Our earnings before taxes decreased 67% when compared to the same quarter in 2008, and our income tax expense decreased similarly by $23.3 million, to $11.4 million, for the 13-week period ended March 28, 2009, from $34.7 million for the 13-week period ended March 29, 2008.  The effective tax rate was 19.0% in the first quarter of 2009 and the first quarter of 2008.

Net Income

As a result of the above, net income decreased 67.2% for the 13-week period ended March 28, 2009 to $48.5 million compared to $147.8 million for the 13-week period ended March 29, 2008.

 

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Liquidity and Capital Resources

Net cash generated by operating activities was $299.4 million for the 13-week period ended March 28, 2009 compared to $192.3 million for the 13-week period ended March 29, 2008. We attempt to carry sufficient inventory levels of finished goods and key components so that potential supplier shortages have as minimal an impact as possible on our ability to deliver our finished products. We experienced a $71.8 million year-to-date decrease in net inventories in this 13-week period of 2009.   Accounts receivable decreased $321.2 million, net of bad debts, during the first quarter of 2009 due to collections following the seasonally strong fourth quarter of 2008.

Cash flow used in investing activities during the 13-week period ending March 28, 2009 was $66.0 million.  Cash flow used in investing activities principally related to $13.1 million in capital expenditures primarily related to business operation and maintenance activities, the net purchase of $52.0 million of fixed income securities associated with the investment of our on-hand cash balances, and the purchase of intangible assets for $0.9 million. 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 average interest rate return on cash and investments during the first quarter of 2009 was 1.8%

Net cash used in financing activities during the period was $1.7 million resulting from the use of $1.8 million for stock repurchased under our stock repurchase plan, offset by $0.1 million from the issuance of common stock related to our Company stock option plan and stock based compensation tax benefits.

We currently use cash flow from operations to fund our capital expenditures and to support our working capital requirements. We expect that future cash requirements will principally be for capital expenditures, working capital requirements, repurchase of shares, and payment of dividends declared.

We believe that our existing cash balances and cash flow from operations will be sufficient to meet our projected capital expenditures, working capital, repurchase of shares, and other cash requirements at least through the end of fiscal 2009.

Contractual Obligations and Commercial Commitments

Pursuant to certain supply agreements, the Company is contractually committed to make purchases of approximately $37.2 million over the next 5 years.

 

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

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Item 3.  Quantitative and Qualitative Disclosures About Market Risk

Market Sensitivity

We have market risk primarily in connection with the pricing of our products and services and the purchase of raw materials.  Product pricing and raw material costs are both significantly influenced by semiconductor market conditions.  Historically, during cyclical economic downturns, we have been able to offset pricing declines for our products through a combination of improved product mix and success in obtaining price reductions in raw material costs.   In the current quarter, we were not able to offset the steep decline in sales with cost savings resulting in a significant decrease in gross and operating margins.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations.  If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases.  Our inability or failure to do so could adversely affect our business, financial condition and results of operations.

Foreign Currency Exchange Rate Risk

The operation of the Company’s subsidiaries in international markets results in exposure to movements in currency exchange rates. The potential of volatile foreign exchange rate fluctuations in the future could have a significant effect on our results of operations.    In accordance with Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation, the financial statements of all Company entities with functional currencies that are not United States dollars (USD) are translated for consolidation purposes into USD, the functional currency of Garmin Ltd. and Garmin International, Inc.    Sales, costs, and expenses are translated at rates prevailing during the reporting periods and at end-of-period rates for all assets and liabilities.   The effect of this translation is recorded in a separate component of stockholders’ equity and have been included in accumulated other comprehensive gain/(loss) in the accompanying consolidated balance sheets.

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 all European subsidiaries excluding Garmin Danmark and Garmin Sweden.  As these entities have grown, Euro currency moves generated material gains and losses.   Additionally, Euro-based inter-company transactions in Garmin Ltd. can also generate currency gains and losses.  The Canadian Dollar and Danish Krone, and Swedish Krona are the functional currency of Dynastream Innovations, Inc., Garmin Danmark, and Garmin Sweden respectively; due to these entities’ relative size, currency moves are not expected to have a material impact on the Company’s financial statements.

Interest  Rate Risk

As of March 28, 2009, we are exposed to interest rate risk in connection with our investments in marketable securities.   As interest rates change, the unrealized gains and losses associated with those securities will fluctuate accordingly.    As we have no outstanding long term debt we have no meaningful debt-related interest rate risk.

 

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Item 4.  Controls and Procedures

(a) Evaluation of disclosure controls and procedures. The Company maintains a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion.  A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. As of March 28, 2009, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded as of March 28, 2009 that our disclosure controls and procedures were effective such that the information relating to the Company, required to be disclosed in our Securities and Exchange Commission ("SEC") reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in internal control over financial reporting. There has been no change in the Company’s internal controls over financial reporting that occurred during the Company’s fiscal quarter ended March 28, 2009 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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