Garmin Reports Third Quarter 2011 Results with Strong EPS and Cash Flow; Increasing 2011 Guidance
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Garmin Reports Third Quarter 2011 Results with Strong EPS and Cash Flow; Increasing 2011 Guidance

SCHAFFHAUSEN, Switzerland — (BUSINESS WIRE) — November 3, 2011 — Garmin Ltd. (Nasdaq: GRMN - news) today announced third quarter results for the period ended September 24, 2011.

Third Quarter 2011 Financial highlights:

Year-to-Date 2011 Financial highlights:

Note: In accordance with GAAP, the Company is deferring significant revenue and the related costs associated with high margin sales of certain products bundled with content and services over their economic lives. In the third quarter of 2011, the Company deferred, net of amortization of previous deferrals, $24 million of revenue, $7 million of costs, and approximately $0.08 of diluted EPS, net of taxes, into future years. This compares to third quarter of 2010 net deferrals of $29 million of revenue, $3 million of costs, and approximately $0.10 of diluted EPS, net of taxes. A table outlining the impact of this net deferral in both 2011 and 2010 is included for reference. In the third quarter, the Company changed the per unit revenue and cost deferral primarily due to the shrinking price difference between bundled products and non-bundled products. A footnote outlining the basis for the change, and its impact, is provided in the Company’s 10Q to be filed with the Securities and Exchange Commission today. Results have not been adjusted unless specifically stated as such.

Business highlights:

Executive overview from Dr. Min Kao, Chairman and Chief Executive Officer:

“In the third quarter, revenue again exceeded our expectations with fitness and aviation delivering strong growth even though macroeconomic conditions continued to be challenging. Free cash flow generation continued to be strong at $174 million in the third quarter. This supports our high yield quarterly dividend, as well as ongoing diversification through research and development investment and strategic acquisitions,” said Dr. Min Kao, chairman and chief executive officer of Garmin Ltd. “Based on our results in the quarter, we now expect to deliver revenues of approximately $2.6 billion and pro forma EPS of $2.30 - $2.40 in 2011.

The automotive/mobile segment posted a 13% revenue decline in the third quarter but was ahead of our expectations. Market share gains in our EMEA operations contributed growth but were offset by the significant volume declines in the North American PND market. Our average selling price (ASP) in the quarter was relatively stable due to an increase in the popularity of our bundled product offerings, offset by a decrease in the ASP of comparable models from the prior year. The reported operating margin for the segment was 15% driven by product mix and the updated deferred revenue model associated with certain bundled products. When adjusted for net deferred revenue and costs associated with bundled products, operating margin would have been 18%.

The outdoor segment posted revenue growth of 5% including contributions from our recent acquisition of Tri-Tronics. This was slightly below expectation as growth in the quarter was restrained due to the limited availability of new products. Both our Approach® S1 for the golfers and our Astro® 320 dog tracking product sold very well. We have also seen our new eTrex®, GPSMAP® 62 and Montana series of handhelds gain significant traction with the outdoor consumers which we believe will be a contributing factor to improving growth rates in the fourth quarter as supply improves.

The fitness segment posted revenue growth of 29% with strong results continuing from our high-end Forerunner® 610 and Edge 800. While we have seen an increasing number of competitors in the fitness market, we have maintained our top position in the GPS-enabled fitness category by offering a range of products from entry-level with basic functionality like “how far and how fast” to the high-end Forerunner 910 for the triathlete market.

The marine segment posted revenue growth of 4% with chartplotters and fishfinders contributing growth. We continue to build the Garmin brand in the marine industry and were pleased to be selected as the official supplier of marine navigation systems to the 34th America’s Cup, illustrating our ability to deliver customized systems to the sailboat racing community. We are investing heavily in both research and development and support infrastructure as we grow our long-term OEM presence.

The aviation segment posted revenue growth of 18% as the retrofit market improved year-over-year driven by new product introductions. We also experienced a slight increase in OEM equipment deliveries, even as the overall general aviation market remains depressed. We are excited about the two recent key OEM business jet announcements: Cessna’s M2 with the Garmin G3000 cockpit and Cessna’s Latitude with the Garmin G5000 cockpit. These are scheduled to begin production in 2013 and 2015, respectively.”

Financial overview from Kevin Rauckman, Chief Financial Officer:

“Our strategic focus on a diversified business model is serving us well,” said Kevin Rauckman, Chief Financial Officer of Garmin Ltd. “Gross margin for the overall business in the third quarter improved both sequentially and year-over-year to 52%, contributed by an improved product mix and lower than anticipated deferral of revenues associated with our bundled products in the automotive/mobile segment.

Operating margin was 22% in the quarter, a sequential improvement from 20% in the second quarter. On a year-over-year basis, total operating expenses increased by $20 million. Advertising expense decreased by $6 million as cooperative advertising and media spending were reduced in the automotive/mobile segment. Research and development increased by $3 million due to our recent acquisitions. Other selling, general and administrative expenses increased by $22 million driven primarily by the acquisitions.

We generated $174 million of free cash flow in the third quarter of 2011. We had a cash and marketable securities balance of over $2.4 billion at the end of the quarter after payment of approximately $155 million for the June 30 dividend installment.”

2011 Full-Year Guidance

      2011
Revenue     $2.6 B
Gross Margin     47% - 48%
Operating Margin     18% - 19%
EPS (Pro Forma)     $2.30 - $2.40
   

We now expect revenue of approximately $2.6 billion. Our EPS range has also increased due to the improved margin outlook for the full year. These factors and an anticipated effective tax rate of approximately 12% result in a forecasted 2011 pro forma EPS of $2.30 - $2.40.

Non-GAAP Measures

Pro Forma net income (earnings) per share

Management believes that net income per share before the impact of foreign currency translation gain or loss and other one-time items is an important measure. The majority of the Company’s consolidated foreign currency gain or loss results from transactions involving the Euro, the British Pound Sterling and the Taiwan Dollar and from the exchange rate impact of the significant cash and marketable securities, receivables and payables held in U.S. dollars at the end of each reporting period by the Company’s various non U.S. subsidiaries. Such gain or loss is required under GAAP because the functional currency of the subsidiaries differs from the currency in which various assets and liabilities are held. However, there is minimal cash impact from such foreign currency gain or loss. Accordingly, earnings per share before the impact of foreign currency translation gain or loss allow an assessment of the Company’s operating performance before the non-cash impact of the position of the U.S. Dollar versus other currencies, which permits a consistent comparison of results between periods.

The following table contains a reconciliation of GAAP net income per share to pro forma net income per share.

                 
Garmin Ltd. And Subsidiaries
Net income per share (Pro Forma)
(in thousands, except per share information)
 
13-Weeks Ended 39-weeks Ended
Sept 24, Sept 25, Sept 24, Sept 25,
2011     2010 2011     2010
 
Net Income (GAAP) $150,381 $279,552 $355,340 $451,696
Foreign currency (gain) / loss, net of tax effects ($12,795 ) ($27,784 ) ($11,062 ) $43,745
One-time tax adjustment -       ($114,605 ) -       ($114,605 )
Net income (Pro Forma) $137,586       $137,163   $344,278       $380,836  
 
Net income per share (GAAP):
Basic $0.77 $1.44 $1.83 $2.28
Diluted $0.77 $1.43 $1.82 $2.27
 
Net income per share (Pro Forma):
Basic $0.71 $0.71 $1.77 $1.93
Diluted $0.71 $0.70 $1.77 $1.91
 
Weighted average common shares outstanding:
Basic 194,112 194,482 194,028 197,785
Diluted 194,828 195,305 194,809 198,891
 

Free cash flow

Management believes that free cash flow is an important financial measure because it represents the amount of cash provided by operations that is available for investing and defines it as operating cash flow less capital expenditures for property and equipment.

The following table contains a reconciliation of GAAP net cash provided by operating activities to free cash flow.

                 
Garmin Ltd. And Subsidiaries
Free Cash Flow
(in thousands)
 

13-Weeks Ended

39-weeks Ended
Sept 24, Sept 25, Sept 24, Sept 25,
2011 2010 2010 2010
 
Net cash provided by operating activities $186,523 $204,348 $597,476 $586,215
Less: purchases of property and equipment ($12,208 ) ($9,763 ) ($26,523 ) ($22,983 )
Free Cash Flow $174,315   $194,585   $570,953   $563,232  
 

Net deferred revenues and costs

The following table illustrates the net effect of deferred revenues and costs associated with certain products bundled with content and services. These revenues and costs are being amortized over the estimated economic lives of the products. Additional details are available in the Quarterly Report on Form 10-Q for the quarter ended September 24, 2011 that will be filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983) today.

Garmin Ltd. And Subsidiaries
Net Deferred Revenue and Cost Impact (Unaudited)
(In thousands, except per share information)
       
13-Weeks Ended 39-Weeks Ended
Sept 24, Sept 25, Sept 24, Sept 25,
Effect of revenue and cost deferrals on: 2011   2010 2011   2010
Net sales $ (23,829 ) $ (28,713 ) $ (107,356 ) $ (66,633 )
Cost of goods sold   (6,673 )   (3,337 )   (21,230 )   (9,883 )
Gross profit (17,156 ) (25,376 ) (86,126 ) (56,750 )
 
Operating income (17,156 ) (25,376 ) (86,126 ) (56,750 )
 
Income tax provision based on normalized tax effects   (2,417 )   (5,531 )   (9,431 )   (11,294 )
       
Net income $ (14,739 ) $ (19,845 ) $ (76,695 ) $ (45,456 )
 
Net income per share:
Basic $ (0.08 ) $ (0.10 ) $ (0.40 ) $ (0.23 )
Diluted $ (0.08 ) $ (0.10 ) $ (0.39 ) $ (0.23 )
 

Earnings Call Information

The information for Garmin Ltd.’s earnings call is as follows:

When:     Wednesday, November 2, 2011 at 10:30 a.m. Eastern
Where:

http://www.garmin.com/aboutGarmin/invRelations/irCalendar.html

How: Simply log on to the web at the address above or call to listen in at 888-378-4353.
Contact:

Email Contact

 

An archive of the live webcast will be available until December 7, 2011 on the Garmin website at http://www.garmin.com. To access the replay, click on the Investor Relations link and click over to the Events Calendar page.

This release includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding the company’s estimated earnings and revenue for fiscal 2011, the Company’s expected segment revenue growth rate, margins, new products to be introduced in 2011 and the company’s plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this release may not occur and actual results could differ materially as a result of risk factors affecting Garmin, including, but not limited to, the risk factors that are described in the Annual Report on Form 10-K for the year ended December 25, 2010 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2010 Form 10-K can be downloaded from http://www.garmin.com/aboutGarmin/invRelations/finReports.html.

The global leader in satellite navigation, Garmin Ltd. and its subsidiaries have designed, manufactured, marketed and sold navigation, communication and information devices and applications since 1989 – most of which are enabled by GPS technology. Garmin’s products serve automotive, mobile, wireless, outdoor recreation, fitness, marine, aviation, and OEM applications. Garmin Ltd. is incorporated in Switzerland, and its principal subsidiaries are located in the United States, Taiwan and the United Kingdom. For more information, visit Garmin's virtual newsroom at www.garmin.com/newsroom or contact the Media Relations department at 913-397-8200.

Garmin, nüvi, Edge, aera, Approach, Astro, eTrex, GPSMAP and Forerunner are registered trademarks, and Vector and Montana are trademarks of Garmin Ltd. or its subsidiaries. All other brands, product names, company names, trademarks and service marks are the properties of their respective owners. All rights reserved.

Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
             
(Unaudited)      
Sept 24, December 25,
2011       2010
Assets
Current assets:
Cash and cash equivalents $1,389,406 $1,260,936
Marketable securities 72,784 24,418
Accounts receivable, net 519,226 747,249
Inventories, net 461,304 387,577
Deferred income taxes 26,297 33,628
Deferred costs 31,780 20,053
Prepaid expenses and other current assets 53,117   24,894  
Total current assets 2,553,914 2,498,755
 
Property and equipment, net 423,041 427,805
 
Marketable securities 983,563 777,401
Restricted cash 1,399 1,277
Licensing agreements, net 7,603 1,800
Noncurrent deferred income tax 73,613 73,613
Noncurrent deferred costs 36,134 24,685
Other intangible assets, net 255,618   183,352  
Total assets $4,334,885   $3,988,688  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $182,651 $132,348
Salaries and benefits payable 46,591 49,288
Accrued warranty costs 43,473 49,885
Accrued sales program costs 44,549 107,261
Deferred revenue 139,528 89,711
Accrued royalty costs 77,907 95,086
Accrued advertising expense 24,595 21,587
Other accrued expenses 97,081 63,043
Deferred income taxes 4,645 4,800
Income taxes payable 20,163 56,028
Dividend payable 232,889   0  
Total current liabilities 914,072 669,037
 
Deferred income taxes 12,199 6,986
Non-current income taxes 165,545 153,621
Non-current deferred revenue 173,355 108,076
Other liabilities 1,522 1,406
 
Stockholders' equity:
Shares, CHF 10 par value, 208,077,418 shares authorized and issued;
194,171,773 shares outstanding at September 24, 2011;
and 194,358,038 shares outstanding at December 25, 2010; 1,797,435 1,797,435
Additional paid-in capital 61,309 38,268
Treasury stock (113,681 ) (106,758 )
Retained earnings 1,248,443 1,264,613
Accumulated other comprehensive income 74,686   56,004  
Total stockholders' equity 3,068,192   3,049,562  
Total liabilities and stockholders' equity $4,334,885   $3,988,688  
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
                       
13-Weeks Ended 39-Weeks Ended
Sept 24, Sept 25, Sept 24, Sept 25,
2011 2010 2011 2010
Net sales $ 666,993 $ 692,364 $ 1,848,925 $ 1,852,196
 
Cost of goods sold   322,662   348,344     944,120   885,615  
 
Gross profit 344,331 344,020 904,805 966,581
 
Advertising expense 35,310 41,002 89,364 100,843
Selling, general and administrative expense 88,751 66,869 247,833 208,379
Research and development expense   72,936   69,512     213,930   205,332  
Total operating expense   196,997   177,383     551,127   514,554  
 
Operating income 147,334 166,637 353,678 452,027
 
Other income (expense):
Interest income 8,464 5,695 23,318 18,364
Foreign currency gains (losses) 14,893 35,527 12,422 (54,614 )
Other   4,345   3,057     9,616   5,071  
Total other income (expense)   27,702   44,279     45,356   (31,179 )
 
Income before income taxes 175,036 210,916 399,034 420,848
 
Income tax provision/(benefit)   24,655   (68,636 )   43,694   (30,848 )
 
Net income $ 150,381 $ 279,552   $ 355,340 $ 451,696  
 
Net income per share:
Basic $ 0.77 $ 1.44 $ 1.83 $ 2.28
Diluted $ 0.77 $ 1.43 $ 1.82 $ 2.27
 
Weighted average common
shares outstanding:
Basic 194,112 194,482 194,028 197,785
Diluted 194,828 195,305 194,809 198,891
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
    39-Weeks Ended
Sept 24,       Sept 25,
2011 2010
Operating Activities:
Net income $355,340 $451,696
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 40,558 39,755
Amortization 19,772 32,471
Loss (gain) on sale of property and equipment (2,407 ) 34
Provision for doubtful accounts 6,227 (3,104 )
Deferred income taxes 12,429 260
Unrealized foreign currency losses/(gains) (5,366 ) 38,635
Provision for obsolete and slow moving inventories 2,590 14,406
Stock compensation expense 27,258 29,412
Realized losses/(gains) on marketable securities (5,633 ) 1,022
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 256,656 351,225
Inventories (58,655 ) (196,270 )
Other current assets (36,713 ) 24,495
Accounts payable (5,603 ) (13,051 )
Other current and non-current liabilities (72,349 ) (261,132 )
Deferred revenue 115,096 65,552
Deferred cost (23,175 ) (10,531 )
Income taxes payable (21,987 ) 24,383
License fees (6,562 ) (3,043 )
Net cash provided by operating activities 597,476 586,215
 
Investing activities:
Purchases of property and equipment (26,523 ) (22,983 )
Purchase of intangible assets (8,611 ) (7,891 )
Purchase of marketable securities (835,965 ) (413,312 )
Redemption of marketable securities 599,740 534,500
Change in restricted cash (122 ) 1,091
Acquisitions, net of cash acquired (52,688 ) -  
Net cash (used in)/provided by investing activities (324,169 ) 91,405
 
Financing activities:
Proceeds from issuance of common stock through
stock purchase and stock option plans 5,619 6,369
Taxes paid related to net share settlement of equity awards (375 ) -
Stock repurchase - (223,378 )
Dividends (154,835 ) (299,103 )
Tax benefit related to stock option exercise 1,542   2,377  
Net cash used in financing activities (148,049 ) (513,735 )
 
Effect of exchange rate changes on cash and cash equivalents 3,212 (19,501 )
   
Net increase in cash and cash equivalents 128,470 144,384
Cash and cash equivalents at beginning of period 1,260,936   1,091,581  
Cash and cash equivalents at end of period $1,389,406   $1,235,965  
 
Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment (Unaudited)
                       
Reporting Segments
Auto/
Outdoor Fitness Marine Mobile Aviation Total
 

13-Weeks Ended September 24, 2011

 
Net sales $94,720 $69,030 $48,055 $384,150 $71,038 $666,993
Gross profit $62,387 $41,476 $26,378 $166,941 $47,149 $344,331
Operating income $41,331 $20,452 $9,870 $56,215 $19,466 $147,334
 
13-Weeks Ended September 25, 2010
 
Net sales $90,329 $53,656 $46,086 $441,891 $60,402 $692,364
Gross profit $62,347 $32,172 $27,765 $179,270 $42,466 $344,020
Operating income $48,230 $19,928 $15,618 $66,588 $16,273 $166,637
                                     
 
39-Weeks Ended September 24, 2011
 
Net sales $242,178 $203,411 $178,479 $1,011,405 $213,452 $1,848,925
Gross profit $156,689 $120,770 $103,784 $378,280 $145,282 $904,805
Operating income $101,805 $61,293 $48,360 $83,087 $59,133 $353,678
 
39-Weeks Ended September 25, 2010
 
Net sales $229,562 $159,475 $161,710 $1,110,040 $191,409 $1,852,196
Gross profit $154,115 $97,728 $101,103 $479,381 $134,254 $966,581
Operating income $110,634 $58,851 $56,694 $172,117 $53,731 $452,027


Contact:

Garmin
Investor Contact:
Kerri Thurston, 913-397-8200
Email Contact
or
Media Contact:
Ted Gartner, 913-397-8200
Email Contact