Garmin Ltd. (GRMN) reported third quarter earnings that beat the Zacks Consensus Estimate by 32 cents. Fully diluted pro forma earnings per share (EPS) were $1.01, compared to 83 cents in the June quarter and 88 cents in the comparable prior-year quarter. The pro forma number excludes a foreign currency gain in the last quarter.


Revenue of $781 million was up 16.8% sequentially and down 10.2% year over year. Both volumes and ASPs contributed to the sequential revenue increase in the last quarter. Total units increased 4.1% sequentially to 3.87 million, while the blended average selling price (ASP) increased 12.2% to $202.08.

Strength was broad-based across geographies. North America contributed 64% of quarterly revenue (up 15.2% sequentially), Europe 30% (up 20.8%), while Asia accounted for the balance (up 13.7%). Although the company usually enjoys better pricing in Europe, the price differential between North America and Europe is fading out.

Revenue by Segment

The auto/mobile, outdoor/fitness, aviation and marine segments generated 69.9%, 16.9%, 7.4% and 5.8% of third quarter revenue, respectively.

The Auto/Mobile segment was up 25.0% sequentially and down 12.9% year over year. The recession had a negative impact on year-over-year comparisons, with ASPs declining 12% and volumes 1%. Sequential strength was due to positive seasonality. Both North American and Asian markets saw strength in the last quarter, while Europe stabilized. The company gained PND market share in North America, which increased from 57% to 60% in the last quarter. Market share in Europe was steady at around 20%.

The Outdoor/Fitness segment was up 22.4% sequentially and 11.4% year over year. The strength in the last quarter was atributable to the success of new products.

The Aviation segment revenue was down 9.7% sequentially and  28.6% year over year. The weakness was due to lower spending, and impacted all the three major areas — OEM, retrofit and portable.

The Marine segment was down 24.5% sequentially, but up 3.1% year over year. The third quarter decline is in line with normal seasonality. The increase from the year-ago period was due to strength in new products.

Gross Margin

Gross margin for the quarter was 52.4%, down 10 basis points (bps) sequentially, but up 810 bps year over year. The auto/mobile segment margin was up 365 bps sequentially and 1,059 bps year over year. The sequential improvement was on account of lower per-unit costs partially offset by lower ASPs.

All other segments saw gross margin declines compared to the June 2009 quarter. On a year-over-year basis, gross margins improved in all except the outdoor/fitness segment. The outdoor/fitness, aviation and marine segments saw sequential declines in gross margin of 508 bps, 715 bps and 568 bps, respectively. Gross margins in these segments grew -9 bps, 153 bps and 446 bps, respectively, from the year-ago period.

Operating Performance

The operating expenses of $172.9 million were up 13.4% from the previous quarter’s $152.5 million. However, the operating margin expanded 56 bps to 30.3%, compared to 29.8% in the second quarter. The higher operating margin was due to lower R&D expenses, partially offset by higher advertising expenses.

On a pro forma basis, GRMN had a net income of $203.4 million, or a 26.0% net income margin compared to $166.7 million, or 24.9% in the previous quarter, and $184.0 million or 21.1% net income margin in the third quarter of last year.

On a fully diluted GAAP basis, the company recorded a net profit of $215.1 million ($1.07 per share) compared to $161.9 million ($0.81 per share) in the previous quarter and a net profit of $171.2 million ($0.82 per share) in the prior-year quarter.

Balance Sheet

Inventories were up 15.5% sequentially, with inventory turns up slightly from 3.9X to 4.0X. Days sales outstanding (DSOs) were around 67 days, down from 70 days in the June quarter. The cash and short-term investments balance increased $51.6 million to around $1.01 billion, with the company generating $293 million from operations. Garmin spent around $12 million on capex, yielding a free cash flow of around $281 million. Garmin has no long-term debt, and long-term liabilities total $249 million.


Management did not provide guidance for the next quarter. However, it did say that PND pricing would weaken in the fourth quarter due to promotional activities, although volumes are expected to be up 40-50% (in-line with normal seasonality). The outdoor/fitness business is expected to be flat sequentially in the fourth quarter. The aviation segment is expected to continue, although year-over-year comparisons are expected to improve. The marine segment is expected to be up sequentially from the seasonally down third quarter.
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