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| GRMN > SEC Filings for GRMN > Form 10-Q on 7-Nov-2012 | All Recent SEC Filings |
7-Nov-2012
Quarterly Report
The discussion set forth below, as well as other portions of this Quarterly Report, contains statements concerning potential future events. Such forward-looking statements are based upon assumptions by our management, as of the date of this Quarterly Report, including assumptions about risks and uncertainties faced by the Company. Readers can identify these forward-looking statements by their use of such verbs as expects, anticipates, believes or similar verbs or conjugations of such verbs. If any of our assumptions prove incorrect or should unanticipated circumstances arise, our actual results could materially differ from those anticipated by such forward-looking statements. The differences could be caused by a number of factors or combination of factors including, but not limited to, those factors identified in the Company's Annual Report on Form 10-K for the year ended December 31, 2011. This report has been filed with the Securities and Exchange Commission (the "SEC" or the "Commission") in Washington, D.C. and can be obtained by contacting the SEC's public reference operations or obtaining it through the SEC's web site on the World Wide Web at http://www.sec.gov. Readers are strongly encouraged to consider those factors when evaluating any forward-looking statement concerning the Company. The Company will not update any forward-looking statements in this Quarterly Report to reflect future events or developments.
The information contained in this Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included in this Form 10-Q and the audited financial statements and notes thereto in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.
The Company is a leading worldwide provider of navigation, communications and information devices, most of which are enabled by Global Positioning System, or GPS, technology. We operate in five business segments, the outdoor, fitness, marine, automotive/mobile and aviation markets. Our segments offer products through our network of independent dealers and distributors. However, the nature of products and types of customers for the five segments may vary significantly. As such, the segments are managed separately.
Results of Operations
The following table sets forth our results of operations as a percentage of net
sales during the periods shown:
13-Weeks Ended
September 29, 2012 September 24, 2011
Net sales 100 % 100 %
Cost of goods sold 47 % 48 %
Gross profit 53 % 52 %
Advertising 4 % 5 %
Selling, general and administrative 13 % 14 %
Research and development 12 % 11 %
Total operating expenses 29 % 30 %
Operating income 24 % 22 %
Other income (expense), net 0 % 4 %
Income before income taxes 24 % 26 %
Provision for/(Benefit from) income taxes 3 % 3 %
Net income 21 % 23 %
39-Weeks Ended
September 29, 2012 September 24, 2011
Net sales 100 % 100 %
Cost of goods sold 45 % 51 %
Gross profit 55 % 49 %
Advertising 5 % 5 %
Selling, general and administrative 14 % 13 %
Research and development 13 % 12 %
Total operating expenses 32 % 30 %
Operating income 23 % 19 %
Other income (expense), net 1 % 3 %
Income before income taxes 24 % 22 %
Provision for/(Benefit from) income taxes 3 % 3 %
Net income 21 % 19 %
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Each of the Company's segments employs the same accounting policies. Allocation of certain research and development expenses, and selling, general, and administrative expenses are made to each segment on a percent of revenue basis. The following table sets forth our results of operations (in thousands) including revenue (net sales), operating income, and income before taxes for each of our five segments during the periods shown. For each line item in the table, the total of the outdoor, fitness, marine, automotive/mobile, and aviation segments' amounts equals the amount in the condensed consolidated statements of income included in Item 1.
Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment
Reportable Segments
Auto/
Outdoor Fitness Marine Mobile Aviation Total
13-Weeks Ended September
29, 2012
Net sales $ 105,572 $ 64,788 $ 44,766 $ 384,393 $ 72,857 $ 672,376
Operating income $ 48,384 $ 21,219 $ 8,378 $ 65,165 $ 16,916 $ 160,062
Income before taxes $ 48,953 $ 21,853 $ 8,705 $ 65,399 $ 17,717 $ 162,627
13-Weeks Ended September
24, 2011
Net sales $ 94,720 $ 69,030 $ 48,055 $ 384,150 $ 71,038 $ 666,993
Operating income $ 41,331 $ 20,452 $ 9,870 $ 56,215 $ 19,466 $ 147,334
Income before taxes $ 44,149 $ 22,619 $ 11,373 $ 77,566 $ 19,329 $ 175,036
39-Weeks Ended September
29, 2012
Net sales $ 283,230 $ 217,815 $ 168,620 $ 1,055,786 $ 221,676 $ 1,947,127
Operating income $ 118,032 $ 76,016 $ 35,584 $ 170,208 $ 54,561 $ 454,401
Income before taxes $ 119,971 $ 77,916 $ 36,596 $ 178,978 $ 56,158 $ 469,619
39-Weeks Ended September
24, 2011
Net sales $ 242,178 $ 203,411 $ 178,479 $ 1,011,405 $ 213,452 $ 1,848,925
Operating income $ 101,805 $ 61,293 $ 48,360 $ 83,087 $ 59,133 $ 353,678
Income before taxes $ 107,258 $ 65,686 $ 51,896 $ 112,449 $ 61,745 $ 399,034
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Comparison of 13-Weeks Ended September 29, 2012 and September 24, 2011
(Amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net Sales
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011 Quarter over Quarter
Net Sales % of Revenues Net Sales % of Revenues $ Change % Change
Outdoor $ 105,572 16 % $ 94,720 14 % $ 10,852 11 %
Fitness 64,788 9 % 69,030 10 % (4,242 ) -6 %
Marine 44,766 7 % 48,055 7 % (3,289 ) -7 %
Automotive/Mobile 384,393 57 % 384,150 58 % 243 0 %
Aviation 72,857 11 % 71,038 11 % 1,819 3 %
Total $ 672,376 100 % $ 666,993 100 % $ 5,383 1 %
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Net sales increased 1% for the 13-week period ended September 29, 2012 when compared to the year-ago quarter. The increase occurred primarily in the outdoor and aviation segments. Automotive/mobile revenue remains the largest portion of our revenue mix at 57% in the third quarter of 2012 compared to 58% in the third quarter of 2011.
Total unit sales increased 7% to 3,689 in the third quarter of 2012 from 3,457 in the same period of 2011. The increase in unit sales volume in the third quarter of fiscal 2012 was primarily attributable to increasing volumes in the outdoor and automotive/mobile segments.
Automotive/mobile segment revenue was flat from the year-ago quarter, as volumes increased 7% and the average selling price (ASP) decreased 7%. The volume gains were primarily related to increasing volumes with our new and existing OEM partners, as well as slight growth in PNDs. The ASP decline was driven by product mix and some comparable model pricing declines due to product life cycle. Company-wide revenue deferrals net of amortization of previously recorded deferrals were $20 million and $24 million for the third quarter of 2012 and 2011, respectively. Outdoor revenues increased 11% from the year-ago quarter as the Company gained market share in the GPS-enabled golf category and experienced strong sell-through of the dog tracking and training product portfolio. Revenues declined in our fitness segment by 6% from the year-ago quarter as 2011 promotional activity drove strong results in the year-ago quarter leading to a decline in running product sales which was only partially offset by growth in the cycling and multi-sport categories. Marine revenues declined 7% from the year-ago quarter as the Company experienced a difficult international marine environment, which was only partially offset by growth in the Americas.
Cost of Goods Sold
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011 Quarter over Quarter
COGS % of Revenues COGS % of Revenues $ Change % Change
Outdoor $ 33,152 31 % $ 32,333 34 % $ 819 3 %
Fitness 22,903 35 % 27,554 40 % (4,651 ) -17 %
Marine 16,194 36 % 21,677 45 % (5,483 ) -25 %
Automotive/Mobile 218,386 57 % 217,209 57 % 1,177 1 %
Aviation 22,686 31 % 23,889 34 % (1,203 ) -5 %
Total $ 313,321 47 % $ 322,662 48 % $ (9,341 ) -3 %
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Cost of goods sold decreased 3% for the 13-weeks period ended September 29, 2012 when compared to the year ago quarter. The decrease was primarily driven by the fitness and marine segments as cost of goods sold as a percentage of revenues decreased by 460 and 890 basis points, respectively. The significant declines in cost of goods sold are primarily related to product mix moving toward newer products with increased features and functionality and higher per unit margins and decreased promotional activities in the current year. Cost of goods sold in the automotive/mobile segment was basically flat both in absolute dollars and as a percentage of sales. The year-over-year impact of deferred revenue and costs was not material to margins. Cost of goods sold per unit declined due to component pricing and product mix. The reduced impact of deferred revenue and costs is related to increased amortization of prior deferrals.
Gross Profit
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011 Quarter over Quarter
Gross Profit % of Revenues Gross Profit % of Revenues $ Change % Change
Outdoor $ 72,420 69 % $ 62,387 66 % $ 10,033 16 %
Fitness 41,885 65 % 41,476 60 % 409 1 %
Marine 28,572 64 % 26,378 55 % 2,194 8 %
Automotive/Mobile 166,007 43 % 166,941 43 % (934 ) -1 %
Aviation 50,171 69 % 47,149 66 % 3,022 6 %
Total $ 359,055 53 % $ 344,331 52 % $ 14,724 4 %
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Gross profit dollars in the third quarter of 2012 increased 4% while gross profit margin increased 180 basis points compared to the third quarter of 2011 driven by margin improvement in all segments excluding the automotive/mobile segment. Marine and fitness gross profit margin percentage increased most significantly at 890 basis points and 460 basis points, respectively, from the year-ago quarter driven primarily by product mix shifting toward new products and less promotional activity in the current year as discussed above. The outdoor segment provided the largest increase in gross profit dollars due primarily to strong revenue growth and new product introductions.
Advertising Expense
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011 Quarter over Quarter
Advertising % of Revenues Advertising % of Revenues $ Change % Change
Outdoor $ 5,120 5 % $ 4,395 5 % $ 725 16 %
Fitness 5,985 9 % 5,063 7 % 922 18 %
Marine 2,454 5 % 2,451 5 % 3 0 %
Automotive/Mobile 15,467 4 % 22,414 6 % (6,947 ) -31 %
Aviation 1,076 1 % 987 1 % 89 9 %
Total $ 30,102 4 % $ 35,310 5 % $ (5,208 ) -15 %
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Advertising expense decreased 15% in absolute dollars. The decrease in absolute dollars occurred in the automotive/mobile segment and was driven primarily by a reduction in cooperative advertising paid to our retail partners in the PND category. As a percentage of revenues, advertising expenses were 4% in the third quarter of 2012 and 5% in the third quarter of 2011 driven by the decrease in the automotive/mobile segment.
Selling, General and Administrative Expense
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011
Selling, General & Selling, General & Quarter over Quarter
Admin. Expenses % of Revenues Admin. Expenses % of Revenues $ Change % Change
Outdoor $ 13,842 13 % $ 12,331 13 % $ 1,511 12 %
Fitness 8,721 13 % 10,442 15 % (1,721 ) -16 %
Marine 6,713 15 % 7,209 15 % (496 ) -7 %
Automotive/Mobile 52,846 14 % 56,030 15 % (3,184 ) -6 %
Aviation 4,280 6 % 2,739 4 % 1,541 56 %
Total $ 86,402 13 % $ 88,751 13 % $ (2,349 ) -3 %
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Selling, general and administrative expense decreased 3% in absolute dollars while decreasing 50 basis points as a percentage of revenues compared to the year-ago quarter. The absolute dollar decrease is primarily related to reduced commissions expense associated with web-based sales. Aviation expense increased in the third quarter of 2012 due to a reduction in bad debt expense recorded in the third quarter of 2011.
Research and Development Expense
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011
Research & Research & Quarter over Quarter
Development % of Revenues Development % of Revenues $ Change % Change
Outdoor $ 5,074 5 % $ 4,330 5 % $ 744 17 %
Fitness 5,960 9 % 5,519 8 % 441 8 %
Marine 11,027 25 % 6,848 14 % 4,179 61 %
Automotive/Mobile 32,529 8 % 32,282 8 % 247 1 %
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Research and development expense increased 13% due to ongoing development activities for new products and the addition of over 275 new engineering personnel to our staff since the year-ago quarter. In absolute dollars, research and development costs increased $9.6 million when compared with the year-ago quarter representing a 130 basis point increase as a percent of revenue with the largest increases in marine and aviation where we are investing heavily for future growth opportunities.
Operating Income
13-weeks ended Sept 29, 2012 13-weeks ended Sept 24, 2011 Quarter over Quarter
Operating Income % of Revenues Operating Income % of Revenues $ Change % Change
Outdoor $ 48,384 46 % $ 41,331 44 % $ 7,053 17 %
Fitness 21,219 33 % 20,452 30 % 767 4 %
Marine 8,378 19 % 9,870 21 % (1,492 ) -15 %
Automotive/Mobile 65,165 17 % 56,215 15 % 8,950 16 %
Aviation 16,916 23 % 19,466 27 % (2,550 ) -13 %
Total $ 160,062 24 % $ 147,334 22 % $ 12,728 9 %
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Operating income increased 9% in absolute dollars and 170 basis points as a percent of revenue when compared to the third quarter of 2011. Revenue growth and improving gross margin percentage, as discussed above, were only slightly offset by increased operating expenses.
Other Income (Expense)
13-weeks ended 13-weeks ended
Sept 29, 2012 Sept 24, 2011
Interest Income $ 7,987 $ 8,464
Foreign Currency Exchange (6,364 ) 14,893
Other 942 4,345
Total $ 2,565 $ 27,702
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The average return on cash and investments during the third quarter of 2012 was 1.2% compared to 1.1% for the third quarter of 2011 with a slight decline in interest income offset by capital gains on investments.
Foreign currency gains and losses for the Company are primarily tied to movements by the Taiwan Dollar, the Euro, and the British Pound Sterling. The Taiwan Dollar is the functional currency of Garmin Corporation. The U.S. Dollar remains the functional currency of Garmin (Europe) Ltd. The Euro is the functional currency of most European subsidiaries. As these entities have grown, currency fluctuations can generate material gains and losses. Additionally, Euro-based inter-company transactions can also generate currency gains and losses. Due to the relative size of the entities using a functional currency other than the Taiwan Dollar, the Euro and the British Pound Sterling, currency fluctuations related to these entities are not expected to have a material impact on the Company's financial statements.
The majority of the $6.4 million currency loss in the third quarter of 2012 was due to the weakening of the U.S. Dollar against the Taiwan Dollar. The weakening of the U.S. Dollar compared to the Euro and the British Pound Sterling contributed a partially offsetting gain. The movements of the Taiwan Dollar and Euro/British Pound Sterling have offsetting impacts due to the use of the Taiwan Dollar for manufacturing costs and cash held in non-functional currency while the Euro and British Pound Sterling transactions relate to revenue and related accounts receivable. During the third quarter of 2012, the U.S. Dollar weakened 2.1% compared to the Taiwan Dollar resulting in a loss of $17.4 million. Offsetting this loss, the U.S. Dollar weakened 2.6% and 3.8% against the Euro and the British Pound Sterling, respectively, resulting in a $10.9 million gain. The remaining net currency gain of $0.1 million is related to other currencies and timing of transactions.
The majority of the $14.9 million currency gain in the third quarter of 2011 was due to the strengthening of the U.S. Dollar compared to the Taiwan Dollar offset by losses associated with the U.S. Dollar strengthening against the Euro and the British Pound Sterling. During the third quarter of 2011, the U.S. Dollar strengthened 4.8% compared to the Taiwan Dollar resulting in a gain of $43.2 million. Offsetting this gain in the third quarter of 2011, the U.S. Dollar strengthened 5.1% and 3.6%, respectively, compared to the Euro and the British Pound Sterling, resulting in a loss of $27.4 million. The remaining net currency loss of $0.9 million related to other currencies and timing of transactions.
Income Tax Provision
Our earnings before taxes decreased 7% when compared to the same quarter in 2011, while our income tax expense decreased 10%, to $22.3 million for the 13-week period ended September 29, 2012, from $24.7 million for the 13-week period ended September 24,2011. The effective tax rate was 13.7% in the third quarter of 2012 and 14.1% in the third quarter of 2011. The decrease in the effective tax rate was primarily driven by the mix of income by tax jurisdiction.
Net Income
As a result of the above, net income decreased 7% for the 13-week period ended September 29, 2012 to $140.3 million compared to $150.4 million for the 13-week period ended September 24, 2011.
Comparison of 39-Weeks Ended September 29, 2012 and September 24, 2011
(Amounts included in the following discussion are stated in thousands unless otherwise indicated)
Net Sales
39-weeks ended Sept 29, 2012 39-weeks ended Sept 24, 2011 Year over Year
Net Sales % of Revenues Net Sales % of Revenues $ Change % Change
Outdoor $ 283,230 15 % $ 242,178 13 % $ 41,052 17 %
Fitness 217,815 11 % 203,411 11 % 14,404 7 %
Marine 168,620 9 % 178,479 10 % (9,859 ) -6 %
Automotive/Mobile 1,055,786 54 % 1,011,405 55 % 44,381 4 %
Aviation 221,676 11 % 213,452 11 % 8,224 4 %
Total $ 1,947,127 100 % $ 1,848,925 100 % $ 98,202 5 %
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Net sales increased 5% for the 39-weeks period ended September 29, 2012 when compared to the year-ago period. The increase occurred across all segments excluding marine with the greatest increase in the outdoor segment. Automotive/mobile revenue remains the largest portion of our revenue mix, but declined from 55% in the 39-week period of 2011 compared to 54% in the 39-week period of 2012.
Total unit sales increased 6% to 10,317 for the 39-weeks ended September 29, 2012 compared to 9,738 in the same period of 2011. The unit sales volume increase in the first three quarters of fiscal 2012 was primarily attributable to increasing volumes in the outdoor and automotive/mobile segments.
Automotive/mobile segment revenue increased 4% from the year-ago period, as volumes increased 5% and the average selling price (ASP) decreased slightly. The volume gains were related to global market share gains, increasing volumes with our OEM partners and our acquisition of Navigon in July 2011. Company-wide revenue deferrals net of amortization of previously recorded deferrals were $35 million and $107 million for the 39-week periods ended September 29, 2012 and September 24, 2011, respectively. The reduced impact of deferred revenue is related to a reduced per unit revenue deferral rate due to a change in . . .
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