10-QPeriod: Q3 FY2006

GARMIN LTD Quarterly Report for Q3 Ended Sep 30, 2006

Filed November 7, 2006For Securities:GRMN

Summary

Garmin Ltd. reported strong financial performance for the third quarter and the first nine months of 2006, demonstrating significant year-over-year growth across key metrics. Net sales surged by 62.3% for the quarter and 64.1% year-to-date, largely driven by exceptional performance in the automotive/mobile segment, which saw a 147.2% quarterly increase and a 168.3% year-to-date increase in net sales. This growth was fueled by new personal navigation device (PND) offerings. The company also experienced robust demand in its outdoor/fitness and marine segments, contributing to a substantial overall revenue increase. While gross profit margins saw a slight decline due to the changing product mix and increased R&D and SG&A expenses, operating income rose significantly by 42.1% for the quarter and 48.2% year-to-date. Net income also saw a healthy increase of 20% for the quarter and 49% year-to-date, reflecting efficient management and strong sales momentum.

Key Highlights

  • 1Net sales increased by 62.3% to $407.997 million for the third quarter of 2006 compared to the prior year period.
  • 2Automotive/Mobile segment revenue experienced exceptional growth, up 147.2% year-over-year for the quarter, driven by strong sales of PNDs like nüvi and c-series.
  • 3Gross profit increased by 53.6% to $198.86 million for the quarter, though the gross profit margin declined by 2.8 percentage points to 48.7%.
  • 4Operating income grew by 42.1% to $120.972 million for the third quarter, but the operating margin decreased to 29.6% from 33.9%.
  • 5Net income increased by 20% to $122.978 million for the third quarter, with diluted EPS rising to $0.56 from $0.47.
  • 6The company recognized $3.4 million in stock-based compensation expense in Q3 2006 due to the adoption of SFAS No. 123(R).
  • 7Cash generated from operations was $249.1 million for the first nine months of 2006, a significant increase from $175.3 million in the prior year period, supporting inventory build-up and capital expenditures.

Frequently Asked Questions

Garmin's net sales surged by 62.3% in the third quarter of 2006, primarily driven by a substantial 147.2% increase in the Automotive/Mobile segment, fueled by strong demand for new personal navigation devices (PNDs) like the nüvi and c-series. The Outdoor/Fitness and Marine segments also contributed positively with strong demand for new product offerings.

Garmin adopted SFAS No. 123(R) on January 1, 2006. For the third quarter of 2006, this resulted in the recognition of $3.4 million in stock-based compensation expense. This adoption decreased income before income taxes by $3.7 million and net income by $3.1 million for the quarter, and reduced basic and diluted earnings per share by $0.01.

The company generated $249.1 million in operating cash flow for the first nine months of 2006, a substantial increase from the prior year. This cash flow, along with existing cash balances, is expected to be sufficient to fund capital expenditures, working capital needs, share repurchases, and dividends at least through the end of fiscal year 2006. The company is strategically increasing inventory levels to meet anticipated holiday demand and overall growing product demand.

Garmin is involved in several ongoing legal proceedings, most notably patent infringement lawsuits with TomTom, Inc. and TomTom International B.V., as well as a patent infringement suit initiated by Encyclopaedia Britannica. While Garmin believes these claims are without merit and intends to defend them vigorously, the company acknowledges that an unfavorable outcome could have a material adverse effect on its operating results, liquidity, or financial position. A preliminary relief action against TomTom in the Netherlands was decided in Garmin's favor.