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

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.”

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