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Press release from Business Wire

Garmin Reports Second Quarter 2011 Results with Continued Strong Cash Flow Generation

Wednesday, August 03, 2011

Garmin Reports Second Quarter 2011 Results with Continued Strong Cash Flow Generation07:00 EDT Wednesday, August 03, 2011 SCHAFFHAUSEN, Switzerland (Business Wire) -- Garmin Ltd. (Nasdaq: GRMN) today announced second quarter results for the period ended June 25, 2011. Second Quarter 2011 Financial highlights: Total revenue of $674 million, down 8% from $729 million in second quarter 2010 with four segments posting growth: Automotive/Mobile segment revenue decreased 19% to $363 million Outdoor segment revenue increased 1% to $81 million Fitness segment revenue increased 25% to $78 million Aviation segment revenue increased 13% to $73 million Marine segment revenue increased 6% to $79 million Geographically, both Europe and Asia contributed growth in second quarter 2011: North America revenue was $358 million compared to $455 million, down 21% Europe revenue was $253 million compared to $226 million, up 12% Asia revenue was $63 million compared to $48 million, up 31% Units shipped decreased 6% year-over-year to 3.8 million units Gross margin improved sequentially and decreased year-over-year to 48% in the current quarter compared to 47% in first quarter 2011 and 54% in second quarter 2010 Operating margin declined on a year-over-year basis to 20% compared to 28% in second quarter 2010 but improved sequentially from 15% in first quarter of 2011 Diluted earnings per share (EPS) decreased 16% to $0.56 from $0.67 in second quarter 2010; pro forma diluted EPS decreased 26% to $0.63 from $0.85 in the same quarter in 2010. (Pro forma EPS excludes the impact of foreign currency transaction gain or loss.) Free cash flow generation of $196 million in second quarter 2011 Year-to-Date 2011 Financial highlights: Total revenue of $1.18 billion, up 2% from $1.16 billion year-to-date 2010 Automotive/Mobile segment revenue decreased 6% to $627 million Outdoor segment revenue increased 6% to $147 million Fitness segment revenue increased 27% to $134 million Aviation segment revenue increased 9% to $142 million Marine segment revenue increased 13% to $130 million Europe and Asia contributed revenue growth while North America declined: North America revenue was $638 million compared to $709 million, down 10% Europe revenue was $424 million compared to $360 million, up 18% Asia revenue was $120 million compared to $91 million, up 32% Units shipped increased 2% year-over-year to 6.3 million units Gross margin decreased to 47% in 2011 compared to 54% in 2010 Operating margin decreased on a year-over-year basis to 17% compared to 25% in 2010 Diluted EPS increased 22% to $1.05 from $0.86 in year-to-date 2010; pro forma diluted EPS decreased 14% to $1.06 from $1.23 in year-to-date 2010 (Pro forma EPS excludes the impact of foreign currency transaction gain or loss.) Free cash flow generation of $397 million year-to-date 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 second quarter of 2011, the Company deferred, net of amortization of previous deferrals, $62 million of revenue, $11 million of costs, and approximately $0.23 of diluted EPS, net of taxes, into future years. This compares to second quarter of 2010 net deferrals of $23 million of revenue, $4 million of costs, and approximately $0.08 of diluted EPS, net of taxes. A table outlining the impact of this net deferral in both 2011 and 2010 is included for reference. Results have not been adjusted unless specifically stated as such. Business highlights: Sold 3.8 million units in the second quarter of 2011, with unit growth in both Europe and Asia. Maintained strong PND market share position in North America and grew market share across Europe. Delivered our new fitness device - the Forerunner® 610 fitness watch which has been met with strong demand and exceptional reviews. Received shareholder approval for payment of a quarterly dividend with the first installment paid on June 30. Acquired Navigon® AG, a privately held PND and OEM solution provider based in Hamburg Germany. Acquired Tri-Tronics® Inc., a leading provider of electronic dog training equipment. Executive overview from Dr. Min Kao, Chairman and Chief Executive Officer: “In the second quarter, revenue was slightly ahead of our expectations and we delivered strong free cash flow generation but margins fell short driven by increased deferral of high margin revenues associated with bundled product offerings and increased operating costs due to bad debt and legal expenses,” said Dr. Min Kao, chairman and chief executive officer of Garmin Ltd. “Based on our results in the first half of 2011, we expect to exceed our full year guidance for revenues with $2.5 to $2.6 billion of revenues including contributions from both Navigon and Tri-Tronics. Due primarily to the acceleration of net deferred revenues associated with our bundled product offerings, we now expect our EPS to be in the range of $2.00 - $2.15 per share. Although this falls short of prior expectations, we have improving confidence in the long-term trajectory of both our revenues and earnings with approximately $1.00 of deferred EPS on the balance sheet currently. The automotive/mobile segment posted a 19% revenue decline in the second quarter as OEM growth was offset by significant volume declines in the North American PND market and product mix shifting toward bundled offerings increasing our deferred revenues for this region. Our average selling price (ASP) in the quarter increased 1%, when adjusting for net deferred revenue. While the reported operating margin for the segment remains low at 7%, we note that profitability of the segment is approximately 18% when adjusted for net deferred revenue and costs associated with bundled products. In addition, the operating margin was negatively impacted by one-time bad debt and legal costs in the quarter of approximately $8 million. In addition, we have now completed the acquisition of Navigon AG. This acquisition is attractive to Garmin for three primary reasons. First, Navigon is a contender in the OEM space with a growing customer list. Secondly, their PND market share in Europe is expected to strengthen our position in that geography. Finally, they offer compelling mobile applications that have been well received. We look forward to integrating our respective strengths to build an even stronger global presence. The outdoor segment posted revenue growth of 1% in the second quarter ahead of the launch of a refreshed product line-up in the third quarter including updates to the eTrex®, Rino® and Astro®. We expect these products to drive improved growth in the third quarter. Also, we have now completed our acquisition of Tri-Tronics, a leading provider of electronic dog training equipment. This acquisition allows us to further our product offerings to dog owners and more quickly innovate for this growing market. The fitness segment posted revenue growth of 25% with strong results from our high-end Forerunner 610 and Edge® 800. Our products are doing well across the value spectrum and around the globe. We believe this category remains underpenetrated, offering numerous opportunities for long-term growth. We remain focused on innovation, in both form factor and function that will allow us to maintain our position at the top of the GPS-enabled fitness market. The marine segment posted revenue growth of 6% with our new series of echo™ fishfinders doing well in the market. These products have a lower margin profile than our chartplotters and networked solutions, which has put some pressure on the operating profit of the segment. We expect the margins to improve as product mix normalizes throughout the remainder of the year. The aviation segment posted revenue growth of 13% as the retrofit market improved year-over-year with the launch of our GTN™ 650 and 750 panel mount avionics. As we have said for a number of quarters, the aviation industry and OEM production, in particular, remains relatively flat and we expect recovery to lag that of the overall economy. Nevertheless, our strategic growth initiatives continue and our certifications into new cockpits remain on-target which will contribute to accelerating growth in future years.” Financial overview from Kevin Rauckman, Chief Financial Officer: “Revenue growth in four of our five segments illustrates the ongoing diversification of our business model,” said Kevin Rauckman, Chief Financial Officer of Garmin Ltd. “We now have five distinct segments, each contributing to the earnings and strong free cash flow generation of the organization. Gross margin for the overall business in the second quarter decreased year-over-year to 48%. In 2010, we benefited from the refinement of our warranty estimate which contributed 290 basis points to gross margin across the segments. Deferred gross profit of $51 million compared to $19 million in the year-ago quarter, associated with product mix shifting toward bundled products, was also a primary driver with a negative impact of 200 basis points year-over-year. Operating margin was 20% in the quarter. Total operating expenses increased by $1 million on a year-over-year basis. Advertising and research and development expenses decreased by $8 and $3 million, respectively. Other selling, general and administrative expenses increased by $12 million, or 16%, driven primarily by bad debt expense, legal costs and product support costs. Approximately $8 million of these expenses are one-time in nature. We generated $196 million of free cash flow in the second quarter of 2011. We had a cash and marketable securities balance of almost $2.5 billion at the end of the quarter, of which approximately $155 million was used to pay the June 30 dividend installment of $0.80 per share.” 2011 Full-Year Guidance       2011 Revenue     $2.5 – 2.6 B Gross Margin     45-46% Operating Margin     16-17% EPS (Pro Forma)     $2.00 - $2.15     We now expect revenue in 2011 between $2.5 and $2.6 billion with the improvement driven primarily by the acquisitions of Navigon and Tri-Tronics. While slightly increasing our revenue range, we are reducing our EPS range due to the accelerating deferral of high margin revenues and associated costs. These factors and an anticipated effective tax rate of approximately 12% result in a forecasted 2011 EPS of $2.00 - $2.15. Non-GAAP MeasuresPro 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 SubsidiariesNet income per share (Pro Forma)(in thousands, except per share information)   13-Weeks Ended26-weeks EndedJune 25,June 26,June 25,June 26,2011   20102011   2010   Net Income (GAAP) $109,477 $134,816 $204,959 $172,144 Foreign currency (gain) / loss, net of tax effects 12,588   35,756 2,261   73,916 Net income (Pro Forma) $122,065   $170,572 $207,220   $246,060   Net income per share (GAAP): Basic $0.56 $0.68 $1.06 $0.86 Diluted $0.56 $0.67 $1.05 $0.86   Net income per share (Pro Forma): Basic $0.63 $0.86 $1.07 $1.23 Diluted $0.63 $0.85 $1.06 $1.23   Weighted average common shares outstanding: Basic 194,051 198,948 193,986 199,437 Diluted 194,875 200,102 194,801 200,626   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 SubsidiariesFree Cash Flow(in thousands)             13-Weeks Ended26-weeks EndedJune 25,June 26,June 25,June 26,2011   20102011   2010   Net cash provided by operating activities $203,354 $181,736 $410,953 $381,867 Less: purchases of property and equipment (7,137)   (9,285) (14,315)   (13,220) Free Cash Flow $196,217   $172,451 $396,638   $368,647   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 June 25, 2011 that will be filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983) today.         Garmin Ltd. And SubsidiariesNet Deferred Revenue Impact (Unaudited)(In thousands, except per share information)   13-Weeks Ended26-Weeks EndedJune 25,June 26,June 25,June 26,   2011       2010     2011       2010   Net sales $ (61,701 ) $ (22,911 ) $ (83,527 ) $ (37,920 ) Cost of goods sold   (10,652 )   (3,764 )   (14,557 )   (6,546 ) Gross profit (51,049 ) (19,147 ) (68,970 ) (31,374 )   Operating income (51,049 ) (19,147 ) (68,970 ) (31,374 )   Income tax provision based on normalized tax effects   (7,068 )   (3,446 )   (5,862 )   (5,647 )             Net income $ (43,981 ) $ (15,701 )   $ (63,108 )   $ (25,727 )   Net income per share: Basic $ (0.23 ) $ (0.08 ) $ (0.33 ) $ (0.13 ) Diluted $ (0.23 ) $ (0.08 ) $ (0.32 ) $ (0.13 )   Earnings Call Information The information for Garmin Ltd.'s earnings call is as follows:       When:   Wednesday, August 3, 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 888-551-9020 or 719-457-2606. Contact: investor.relations@garmin.com   An archive of the live webcast will be available until September 6, 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 Schaffhausen, 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, Forerunner, eTrex, Rino, Astro and Edge are registered trademarks, and GTN is a trademark 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 SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except share information)           (Unaudited)June 25,December 25,   2011           2010   Assets Current assets: Cash and cash equivalents $ 1,418,871 $ 1,260,936 Marketable securities 62,626 24,418 Accounts receivable, net 493,057 747,249 Inventories, net 385,678 387,577 Deferred income taxes 27,691 33,628 Deferred costs 28,343 20,053 Prepaid expenses and other current assets   46,261         24,894   Total current assets 2,462,527 2,498,755   Property and equipment, net 423,697 427,805   Marketable securities 1,016,869 777,401 Restricted cash 1,393 1,277 Licensing agreements, net 8,305 1,800 Noncurrent deferred income tax 73,613 73,613 Noncurrent deferred costs 31,047 24,685 Other intangible assets, net   181,004         183,352   Total assets $ 4,198,455       $ 3,988,688     Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 125,680 $ 132,348 Salaries and benefits payable 37,393 49,288 Accrued warranty costs 41,691 49,885 Accrued sales program costs 48,929 107,261 Deferred revenue 134,341 89,711 Accrued royalty costs 27,509 95,086 Accrued advertising expense 23,544 21,587 Other accrued expenses 70,622 63,043 Deferred income taxes 4,435 4,800 Income taxes payable 13,795 56,028 Dividend payable   388,148         0   Total current liabilities 916,087 669,037   Deferred income taxes 13,180 6,986 Non-current income taxes 157,979 153,621 Non-current deferred revenue 146,973 108,076 Other liabilities 1,542 1,406   Stockholders' equity: Shares, CHF 10 par value, 208,077,418 shares authorized and issued; 194,087,445 shares outstanding at June 25, 2011; and 194,358,038 shares outstanding at December 25, 2010; 1,797,435 1,797,435 Additional paid-in capital 53,707 38,268 Treasury stock (116,099 ) (106,758 ) Retained earnings 1,097,970 1,264,613 Accumulated other comprehensive income   129,681         56,004   Total stockholders' equity   2,962,694         3,049,562   Total liabilities and stockholders' equity $ 4,198,455       $ 3,988,688               Garmin Ltd. And SubsidiariesCondensed Consolidated Statements of Income (Unaudited)(In thousands, except per share information)   13-Weeks Ended26-Weeks EndedJune 25,June 26,June 25,June 26,   2011     2010     2011     2010   Net sales $ 674,099 $ 728,765 $ 1,181,933 $ 1,159,833   Cost of goods sold   351,999     337,113     621,459     537,272     Gross profit 322,100 391,652 560,474 622,561   Advertising expense 34,098 42,440 54,054 59,841 Selling, general and administrative expense 85,896 73,832 159,082 141,509 Research and development expense   70,515     73,337     140,994     135,820   Total operating expense   190,509     189,609     354,130     337,170     Operating income 131,591 202,043 206,344 285,391   Other income (expense): Interest income 7,639 5,791 14,854 12,669 Foreign currency gains (losses) (14,611 ) (43,605 ) (2,471 ) (90,141 ) Other   2,453     180     5,271     2,013   Total other income (expense)   (4,519 )   (37,634 )   17,654     (75,459 )   Income before income taxes 127,072 164,409 223,998 209,932   Income tax provision   17,595     29,593     19,039     37,788     Net income $ 109,477   $ 134,816   $ 204,959   $ 172,144     Net income per share: Basic $ 0.56 $ 0.68 $ 1.06 $ 0.86 Diluted $ 0.56 $ 0.67 $ 1.05 $ 0.86   Weighted average common shares outstanding: Basic 194,051 198,948 193,986 199,437 Diluted 194,875 200,102 194,801 200,626     Dividends declared per share $ 2.00 $ 1.50 $ 2.00 $ 1.50         Garmin Ltd. And SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)   26-Weeks EndedJune 25,June 26,   2011     2010   Operating Activities: Net income $ 204,959 $ 172,144 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 27,393 26,746 Amortization 10,861 24,809 Loss (gain) on sale of property and equipment 308 (6 ) Provision for doubtful accounts 3,563 (552 ) Deferred income taxes 7,149 (30 ) Unrealized foreign currency losses/(gains) 16,363 47,880 Provision for obsolete and slow moving inventories (6,998 ) 10,309 Stock compensation expense 17,315 19,099 Realized losses/(gains) on marketable securities (4,176 ) (470 ) Changes in operating assets and liabilities, net of acquisitions: Accounts receivable 265,448 364,401 Inventories 20,659 (64,272 ) Other current assets (31,490 ) 5,142 Accounts payable (13,082 ) (52,248 ) Other current and non-current liabilities (142,918 ) (193,657 ) Deferred revenue 83,628 37,425 Deferred cost (14,652 ) (6,610 ) Income taxes payable (30,033 ) (7,771 ) License fees   (3,344 )   (472 ) Net cash provided by operating activities 410,953 381,867   Investing activities: Purchases of property and equipment (14,315 ) (13,220 ) Purchase of intangible assets (2,587 ) (8,229 ) Purchase of marketable securities (520,759 ) (169,062 ) Redemption of marketable securities 263,428 294,350 Change in restricted cash   (116 )   1,111   Net cash (used in)/provided by investing activities (274,349 ) 104,950   Financing activities: Proceeds from issuance of common stock through stock purchase plan 4,337 5,452 Taxes paid related to net share settlement of equity awards (336 ) - Stock repurchase - (84,328 ) Dividends - (299,103 ) Tax benefit related to stock option exercise   1,197     1,898   Net cash provided by/(used in) financing activities 5,198 (376,081 )   Effect of exchange rate changes on cash and cash equivalents 16,133 (29,148 )     Net (decrease)/increase in cash and cash equivalents 157,935 81,588 Cash and cash equivalents at beginning of period   1,260,936     1,091,581   Cash and cash equivalents at end of period $ 1,418,871   $ 1,173,169                         Garmin Ltd. And SubsidiariesRevenue, Gross Profit, and Operating Income by Segment (Unaudited)     Reporting SegmentsAuto/OutdoorFitnessMarineMobileAviationTotal   13-Weeks Ended June 25, 2011   Net sales $81,007 $78,014 $79,117 $362,706 $73,255 $674,099 Gross profit $52,948 $45,502 $44,208 $128,788 $50,654 $322,100 Operating income $35,667 $25,384 $23,357 $25,277 $21,906 $131,591   13-Weeks Ended June 26, 2010   Net sales $79,847 $62,469 $74,310 $447,225 $64,914 $728,765 Gross profit $53,257 $38,506 $49,108 $205,336 $45,445 $391,652 Operating income $38,035 $24,724 $32,146 $88,548 $18,590 $202,043                                         26-Weeks Ended June 25, 2011   Net sales $147,458 $134,382 $130,425 $627,255 $142,413 $1,181,933 Gross profit $94,301 $79,293 $77,406 $211,340 $98,134 $560,474 Operating income $60,474 $40,841 $38,490 $26,872 $39,667 $206,344   26-Weeks Ended June 26, 2010   Net sales $139,233 $105,819 $115,625 $668,149 $131,007 $1,159,833 Gross profit $91,768 $65,557 $73,338 $300,110 $91,788 $622,561 Operating income $62,404 $38,923 $41,075 $105,530 $37,459 $285,391 Garmin Ltd.Investor Contact:Kerri Thurston, 913-397-8200investor.relations@garmin.comorMedia Contact:Ted Gartner, 913-397-8200media.relations@garmin.com