Garmin’s Outdoor/Fitness Revenues Climb 9% in Q3

Total revenue of $692 million, down 11% from $781 million in third quarter 2009. Its Automotive/Mobile segment revenue decreased 19% to $442 million while its Aviation segment revenue increased 4% to $60 million

    * Posted expanding gross and operating margins in the outdoor/fitness, aviation and marine segments.
    * Sold 3.8 million units in the third quarter of 2010, with unit growth in all business segments except automotive/mobile.
    * Acquired MetriGear, the creator of a pedal-based power solution for cycling which will be integrated with the Edge® family of cycling computers.
    * Announced a series of aviation products and certifications which position us well for future growth as the aviation industry recovers.
    * Selected by the American Boatbuilders Association as a Preferred Supplier of Choice.
    * Repurchased 4.3 million shares of GRMN during the third quarter.

Executive overview from Dr. Min Kao, Chairman and Chief Executive Officer:

“In the third quarter, we saw continued traction for many of our growth strategies resulting in revenue growth in three of our four segments,” said Dr. Min Kao, chairman and chief executive officer of Garmin Ltd. “While we are not satisfied with the overall results, the strong operating income performance in outdoor/fitness, aviation and marine are positive indicators for the long-term profitability of Garmin.

Our auto/mobile segment posted a 19% revenue decline in the third quarter as we faced an extremely difficult comparison to third quarter 2009 when we refreshed the full PND line-up. We also continued to incur significant losses in our mobile handset division. While PND pricing improved sequentially in the third quarter, the comparison to a very strong average selling price (ASP) in 2009 led to a 15% ASP decline year-over-year. Unit declines were single digits as declining market size was offset by increases in market share. OEM initiatives provided triple digit growth in the quarter partially offsetting the impact of the PND market. We continue to invest to capitalize on the growing OEM in-dash opportunity. We are pleased to have an expanded presence in the Chrysler 2011 vehicle line-up including the Jeep Grand Cherokee and Dodge Charger, as well as many others, which we look forward to sharing more details about soon. We are working to secure similar deals around the globe.

During the quarter, we thoroughly analyzed the rapidly changing dynamics of the smartphone market and concluded that we cannot reach the scale necessary to effectively compete in the industry. While this was clearly not the desired outcome, we must be prudent with our ongoing investment in the category and have therefore redeployed research and development resources internally, winding down our investment in mobile handset device development. Those resources are now actively engaged in segments and strategies where we are experiencing growth including fitness, marine OEM, and auto OEM. We have also begun development of mobile applications for the smartphone market.

The outdoor/fitness segment continued its strong performance with 9% revenue growth and 28% operating income growth due to the outstanding margin performance. The fitness business continues to have significant momentum as we approach the holiday season and we are anticipating many promotions focused on this category. To further enhance our position in the cycling market, we recently acquired MetriGear, whose pedal-based power solution will be incorporated with our Edge family of products to deliver the most effective cycling computer suite on the market. This acquisition highlights our goal to offer a broad portfolio of products for both the competitive athlete and the recreational fitness participant, which will allow us to capture a growing percentage of the market.

The aviation segment posted revenue growth of 4%, with operating income growth of 40% due to margin expansion, as we have continued to complete certifications and win new customers. We are confident in our position in this segment and our ability to post long-term growth. This is underscored by recent product announcements and OEM wins including Garmin ESP (Electronic Stability and Protection system) and the retrofit certification for the KingAir 300 and 350 series. Finally, we were excited to announce with Cessna the selection of the G5000 for the upcoming Cessna Citation Ten, a Part 25 business jet. This is the culmination of much research and development effort and is reflective of our growing reputation as a contender in the business jet avionics market.

The marine segment posted revenue growth of 1% but with strong margin performance, operating income grew 33%. After a strong second quarter, the industry weakened as reported by many of our retail and OEM partners. While it is disappointing to see recovery in the industry falter, we are continuing to forge ahead with our growth strategies as the long-term profit potential for the segment is solid. As affirmation of our growing OEM presence, we were selected by the American Boatbuilders Association as a Preferred Supplier of Choice. This selection improves our standing with 13 member OEMs who collectively produce more than 15% of all boats 16 feet or larger in North America.”

Financial overview from Kevin Rauckman, Chief Financial Officer:

“Growth in revenues and margins for our non-PND segments are a positive result of our diversified business model,” said Kevin Rauckman, Chief Financial Officer of Garmin Ltd. “With continued revenue growth in outdoor/fitness, aviation and marine and margin expansion in those segments, they contributed 60% of operating income collectively in the quarter. Unfortunately, it was not enough to offset the level of decline in our auto/mobile segment.

Gross margin for the overall business in the third quarter was 50% with all segments, except auto/mobile, posting year-over-year margin improvement. The gross margin gains in outdoor/fitness, aviation and marine were primarily due to a stable pricing environment while product mix shifted toward higher margin units.

Operating margin in the third quarter was 24%. Total operating expenses increased by $5 million on a year-over-year basis with research and development expenses up $14 million. Offsetting reductions occurred in selling, general and administrative and advertising expenses which declined by $5 and $5 million, respectively. We are focusing significant efforts on appropriately reducing costs in the organization as the PND market matures.

In the quarter, we also released significant income tax reserves recorded in 2006 to 2008 due to the completion of reviews by certain tax authorities. The reserve reversal contributed $0.59 to diluted earnings per share. Excluding the reserve reversal, the effective tax rate in the quarter was 22%. The increased rate was primarily driven by an unfavorable mix of income among taxing jurisdictions. We generated $195 million of free cash flow in the third quarter of 2010 resulting in a cash and marketable securities balance of almost $1.9 billion at the end of the quarter.”