Garmin Tops Q3 Earnings on Higher Aviation & Outdoor Sales

Garmin Ltd. (GRMN) reported strong third-quarter 2014 earnings of 76 cents per share, comfortably beating the Zacks Consensus Estimate of 72 cents, on the back of strong growth in new products that are increasingly diversifying its business.

Despite the earnings beat, the share price plunged 5.7% due to weakness in the company’s Auto/Mobile segment, which was down almost 5% from the year-ago quarter as a result of weak demand for automotive personal navigation products.


Garmin’s third-quarter revenues of $706.3 million were down 9.2% sequentially but up 9.7% year over year and also beat the Zacks Consensus Estimate of $679.0 million. Volumes decreased 3.0% sequentially and 12% year over year to 3.7 million units. Also, the blended average selling price (ASP) was down 5.4% sequentially and 2% year over year to $192.0 per unit. The decrease was driven by mix changes.

Revenues by Segment

Garmin’s Auto/Mobile, Outdoor, Aviation, Fitness and Marine segments generated 44%, 17%, 14%, 17% and 8% of the quarterly revenues, respectively.

Seasonality typically results in considerable variations in quarterly revenues, with the most significant increase being in the December quarter, followed by a major decline in the March quarter.

The Auto/Mobile segment was down 12.1% sequentially and 4.6% from the year-ago quarter. The decrease was due to the continued weakness in the personal navigation device (PND) market.

Garmin expects PND volumes to decline further in 2014, in line with the 2013 rates but believes that niche categories, like dash cams and RV units, will help offset the decline, going forward.

The Aviation segment revenues were up 2.1% sequentially and 19% year over year. The year-over-year increase was due to notable strength in all product categories and OEM share gains. The aviation market recovery appears to be gathering momentum with three straight quarters of double-digit year-over-year growth.

New products, opportunities in the retrofit segment as well as the military and government markets, and share gains in the helicopter market remain the positives for 2014. Management expects new revenue contribution from the Cessna Latitude, Bell 505 and the Bell 525.

The Outdoor segment revenues were up 14.2% sequentially and 19.5% year over year. The increase was driven by strong demand for products like golf, dog tracking and training and wearables.

Management believes that expansion into new categories and products will likely remain an important driver of segmental growth.

The Fitness segment decreased 22.9% sequentially but improved 43.4% year over year. The year-over-year increase was driven by the ramp up in new products including activity trackers and running products.

Management stated that Vivofit product had a strong start in the rapidly growing activity-tracking category. The company also believes that the continued move toward higher-margin products, especially in the running category, will boost segment margins in the near term. GPS-enabled running and cycling products are gaining worldwide popularity, which is good news for market leader, Garmin. In the third quarter, management launched varied products including vivosmart and Forerunner 920XT, which are expected to gain momentum, going forward.

The Marine segment decreased 15.8% sequentially but increased 12.3% from the year-ago quarter. The year-over-year growth was driven by new products including autopilot solutions, chartplotters and radars.

Garmin is trying to build a solid product portfolio (including acquisitions) and the strengthening of strategic relationships with marine OEMs. Management believes that new products including new chartplotters, multifunction displays, radars and autopilots will expand marine revenues in 2015.

Operating Results

The gross margin for the quarter was 56.4%, down 70 basis points (bps) sequentially but up 160 bps year over year. The year-over-year increase was due to a favourable segment mix.

The operating expenses of $222.7 million were up 10.7% from $201.1 million in the year-ago quarter. As a percentage of sales, selling, general & administrative decreased year over year, while advertising, and research & development expenses increased. The net result was an operating margin of 24.8%, up 120 bps year over year.

GAAP net income was ($146.8) million or loss of 76 cents per share as against $187.7 million or earnings of 96 cents per share in the year-ago quarter.

On a pro-forma basis, Garmin reported a net income of $146.4 million compared with $136.2 million in the year-ago quarter. Pro-forma earnings per share were 76 cents compared with 69 cents in the comparable prior-year quarter.

One-time adjustments in the quarter included currency-related gains.

Balance Sheet

Inventories were up 8.6% sequentially to $466.5 million. The cash and short-term investments balance was approximately $1.31 billion versus $1.40 billion in the prior quarter, with operations contributing around $220.0 million.

Garmin spent approximately $18.0 million on capex, yielding free cash flow of around $202.0 million. The company has no long-term debt.

In the reported quarter, the company spent approximately $92 million on dividends and $79 million on share repurchases. The company has now completed its $300 million share repurchase program.


For full-year 2014, management expects revenues of $2.85 billion, the higher-end of the prior guidance of $2.75–$2.85 billion; gross margin of approximately 56% (maintained); operating margin of approximately 24% (maintained); pro-forma tax rate of approximately 17% (prior 15%) and pro-forma earnings of $3.10 per share (prior $2.95–$3.05). The Zacks Consensus Estimate for earnings for 2014 is pegged at $3.08.


Garmin’s results indicate that it is successfully diversifying its business away from the shrinking PND market. Focused research and development efforts resulted in a steady flow of innovative higher-margin products which helped in the shift. The company is also increasingly collaborating with OEMs for product designing, which is increasing volumes, predictability and leading to more stable pricing.

In the reported quarter, the traditional PND business shrank to less than 50% of Garmin’s total business, although it remains the market leader. On the other hand, the company is seeing good growth in its target markets, all of which carry higher margins. Additionally, Garmin increased the 2014 guidance, indicating a strong demand environment for its products, going forward.

Moreover, Garmin’s acquisition of Fusion Electronics will continue to broaden its product portfolio, generating synergies for its customers in both OEM and after-market applications and expanding its share in the marine market.

Garmin’s shares carry a Zacks Rank #3 (Hold). Other stocks that have been performing well and are worth a look include NeoPhotonics Corporation (NPTN), Texas Instruments (TXN) and Inphi Corporation (IPHI). All the stocks carry a Zacks Rank #2 (Buy).
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