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GRMN > SEC Filings for GRMN > Form 10-Q on 7-Nov-2012All Recent SEC Filings

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Form 10-Q for GARMIN LTD


7-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 %

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

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 %

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 %

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 %

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 %

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 %

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 %

Aviation 27,899 38 % 23,957 34 % 3,942 16 % Total $ 82,489 12 % $ 72,936 11 % $ 9,553 13 %

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 %

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

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 %

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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