Garmin Reports First Quarter 2013 Results

The fitness segment posted revenue growth of 2% in the quarter as we compared against strong initial shipments of the Forerunner™ 910XT which launched in first quarter of 2012 and contributed to 26% growth in the year ago quarter. Even with the difficult comparable, we were pleased to see the strong reception by the cycling community to our Edge 510 and 810 which began to ship in the quarter. In addition, consumers continue to gravitate to our Forerunner 10, capturing a new subset of the running market.

The aviation segment posted revenue growth of 10% as the OEM market contributed strong gains in the quarter. Segment revenues exceeded $80 million for the first time since 2008 when OEM production rates peaked. This is evidence of the strong market share gains that the aviation team has achieved. While excited to post such strong performance in the first quarter, we have much work ahead of us with numerous business jet certifications slated for completion in the months ahead. At the same time, we continue to deliver innovation for the retrofit market – recent examples include new offerings for the experimental aircraft market and updates to the Garmin Pilot application, along with best-in-class certified ADS-B solutions with patent pending technologies that satisfy the FAA mandate for tens of thousands of impacted and eligible aircraft.

In the marine segment, revenues declined 10% year-over-year due to several factors including the overall age of our product lineup, unfavorable weather conditions in the U.S., and ongoing macroeconomic uncertainties. In addition to decreased revenue, we experienced a significant reduction in gross margins as it became necessary to discount existing products to maintain market share. Reduced gross margins coupled with a year-over-year increase in research and development expense resulted in an operating loss for the segment. We believe strongly in the innovation that is forthcoming in our glass helms and future offerings and are committed to returning the segment to profitability.

Looking finally at the auto/mobile segment, we posted a 10% revenue decline in the quarter as the PND market continues to decelerate. Though these results are disappointing, they were not unexpected and we are managing our business accordingly. We remain focused on our goals of market leadership and profitability.

Partially offsetting the decline in PNDs is ongoing growth within our auto OEM market. We were excited to announce the news of our relationship with Mercedes Benz, delivering Garmin navigation to most models over the next four years. We are building a strong reputation in the infotainment market and this business relationship highlights the growing level of confidence amongst OEMs that Garmin can be a major supplier in the industry.”

Financial Overview from Kevin Rauckman, Chief Financial Officer:

“Our first quarter results are largely as we had anticipated with growing revenue contribution from outdoor, fitness, and aviation, which represent our most profitable segments,” said Kevin Rauckman, chief financial officer of Garmin Ltd. “It highlights that we are a company that will continue to be highly profitable even as our automotive/mobile segment declines.

Gross margin for the overall business was 52% in the first quarter improving from 51% in the prior year. Segment mix contributed to the overall strong gross margin with revenue growth in aviation and fitness, which posted gross margins of 70% and 62%, respectively. The automotive/mobile segment also contributed improved gross margins driven by the amortization of previously deferred high margin revenues. As previously discussed, marine gross margins declined significantly partially offsetting the improvements noted above.

Operating margin for the overall business was 15% compared to 16% in the year-ago quarter with the gross margin improvement offset by an increase in research and development expense. Total operating expenses increased $3 million year-over-year and by 210 basis points as a percent of sales. Research and development expense increased by $8 million as we continue to invest for future growth. Other selling, general and administrative and advertising costs decreased by $4 million and $1 million, respectively, on a year-over-year basis due to cost containment efforts. As in prior years, we believe that the first quarter will represent the low point for operating margins and with increased seasonal sales volumes, profitability levels are expected to improve.

Our tax rate in the first quarter was (8.6%) compared to 12.8% in the first quarter of 2012. The negative tax rate in 2013 was primarily driven by release of reserves related to expiration of statutes or completion of tax audits, as well as the impact of research and development tax credits related to 2012 but recognized this quarter when related tax legislation was enacted. Adjusting for the release of reserves, our effective tax rate would have been 11.6% in the quarter.

We continued to generate significant free cash flow (FCF) in the quarter though at a lesser rate than the prior year. A major contributing factor to the lower FCF in the first quarter of 2013 was a $41 million tax-related prepayment that will be recovered in the second quarter. We ended the quarter with a cash and marketable securities balance of over $2.7 billion. We intend to fund our quarterly dividend, share repurchases and future acquisitions with our strong cash position.”

Guidance, Share Repurchase and Dividend Update

Consistent with prior years, Garmin plans to update guidance following the second quarter which is seasonally stronger, providing a better preview for the second half of the year. Revenue and pro forma EPS in the first quarter were consistent with our expectations.

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