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Press release from Business Wire

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

Wednesday, November 02, 2011

Garmin Reports Third Quarter 2011 Results with Strong EPS and Cash Flow; Increasing 2011 Guidance06:30 EDT Wednesday, November 02, 2011 SCHAFFHAUSEN, Switzerland (Business Wire) -- Garmin Ltd. (Nasdaq: GRMN - news) today announced third quarter results for the period ended September 24, 2011. Third Quarter 2011 Financial highlights: Total revenue of $667 million, down 4% from $692 million in third quarter 2010 with four segments posting growth: Outdoor segment revenue increased 5% to $95 million Fitness segment revenue increased 29% to $69 million Aviation segment revenue increased 18% to $71 million Marine segment revenue increased 4% to $48 million Automotive/Mobile segment revenue decreased 13% to $384 million Geographically, EMEA (Europe, Middle East and Africa) contributed growth in third quarter 2011: EMEA revenue was $258 million compared to $216 million, up 19% Americas revenue was $352 million compared to $413 million, down 15% APAC (Asia Pacific) revenue was $57 million compared to $63 million, down 10% Units shipped decreased 9% year-over-year to 3.5 million units Gross margin improved both sequentially and year-over-year to 52% in the current quarter compared to 48% in second quarter 2011 and 50% in third quarter 2010 Operating margin improved sequentially to 22% compared to 20% in second quarter of 2011 but declined on a year-over-year basis from 24% in third quarter 2010 Pro forma diluted earnings per share (EPS) increased 1% to $0.71 from $0.70 in the same quarter in 2010 (pro forma EPS excludes the impact of foreign currency transaction gain or loss and one-time tax adjustments); diluted EPS decreased to $0.77 from $1.43 in third quarter 2010 when a one-time tax adjustment added $0.59 Free cash flow generation of $174 million in third quarter 2011 Year-to-Date 2011 Financial highlights: Total revenue of $1.85 billion was flat compared to the year ago period Outdoor segment revenue increased 5% to $242 million Fitness segment revenue increased 28% to $203 million Aviation segment revenue increased 12% to $213 million Marine segment revenue increased 10% to $179 million Automotive/Mobile segment revenue decreased 9% to $1.01 billion EMEA and APAC contributed revenue growth while the Americas declined: EMEA revenue was $682 million compared to $588 million, up 16% APAC revenue was $177 million compared to $155 million, up 14% Americas revenue was $990 million compared to $1.11 billion, down 11% Units shipped decreased 2% year-over-year to 9.7 million units Gross margin decreased to 49% in 2011 compared to 52% in 2010 Operating margin decreased on a year-over-year basis to 19% compared to 24% in 2010 Pro forma diluted EPS decreased 8% to $1.77 from $1.91 in year-to-date 2010 (pro forma EPS excludes the impact of foreign currency transaction gain or loss and one-time tax adjustments); diluted EPS decreased to $1.82 from $2.27 in year-to-date 2010 when a one-time tax adjustment added $0.59 Free cash flow generation of $571 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 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: Sold 3.5 million units in the third quarter of 2011, with positive performance in our EMEA operations offset by declines in the Americas and APAC. Introduced our 2012 nüvi® line-up with products for every lifestyle and budget ranging from Essential to Advanced to Prestige. Announced the Edge® 200 and Vector™ power meter for the cycling community with the Edge 200 shipping in 2011 and Vector in early 2012. Delivered the aera® 795 and 796 portable touchscreen aviation navigators with premium features and capabilities that can only be delivered with a dedicated device. Shipped the Montana™ series of handhelds featuring a 4” touchscreen, sunlight readable display, 5 MP camera and other advanced features desired by our high-end outdoor customers. 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 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 Ended39-weeks EndedSept 24,Sept 25,Sept 24,Sept 25,2011     20102011     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 SubsidiariesFree Cash Flow(in thousands)   13-Weeks Ended39-weeks EndedSept 24,Sept 25,Sept 24,Sept 25,2011201020102010   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 SubsidiariesNet Deferred Revenue and Cost Impact (Unaudited)(In thousands, except per share information)         13-Weeks Ended39-Weeks EndedSept 24,Sept 25,Sept 24,Sept 25, Effect of revenue and cost deferrals on: 2011   20102011   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: investor.relations@garmin.com   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 SubsidiariesCondensed Consolidated Balance Sheets(In thousands, except share information)               (Unaudited)       Sept 24,December 25,2011       2010Assets 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 SubsidiariesCondensed Consolidated Statements of Income (Unaudited)(In thousands, except per share information)                         13-Weeks Ended39-Weeks EndedSept 24,Sept 25,Sept 24,Sept 25,2011201020112010 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 SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)(In thousands)     39-Weeks EndedSept 24,       Sept 25,20112010Operating 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 SubsidiariesRevenue, Gross Profit, and Operating Income by Segment (Unaudited)                         Reporting SegmentsAuto/OutdoorFitnessMarineMobileAviationTotal   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 GarminInvestor Contact:Kerri Thurston, 913-397-8200investor.relations@garmin.comorMedia Contact:Ted Gartner, 913-397-8200media.relations@garmin.com