“We saw steady sequential improvement in our consumer segments during the third quarter and are very pleased to return to year-over-year earnings per share growth in the quarter. While revenues fell year-over-year, the rate of decline moderated at 10% but our margin improvements more than offset that decline. We remain focused on efforts to improve productivity and manage expenses as the consumer spending environment continues to recover.
The automotive/mobile segment continued to show growth on a unit basis in both the North American and Asian markets, while also exhibiting marked improvement in the European market in comparison to the first half of the year. The sequential improvement in pricing and margins in the quarter was largely driven by the delivery of our new 1200, 1300 and 1400 nüvi series. We were also pleased to launch the nüvifone™ G60 on October 4th with AT&T in the United States market. The product represents just one of many ways that Garmin intends to deliver real-time location –based content and services to our customers. Another is the nüvi 1690 which will be prominently featured as our high-end offering for the holiday season.
The outdoor/fitness segment again showed its strength, posting year-over-year revenue growth of 11% with strong gross and operating margins. Our newest outdoor and fitness products including the Dakota™ line of handhelds in the outdoor market, and the Forerunner® line of fitness products, drove the strong third quarter results. We believe that these products along with our newest cycling product, the Edge® 500, will perform well during the holidays due to the gift appeal of this category.
The aviation segment posted a third straight quarter of significant decline as the segment continues to be affected by a difficult economic environment. We do not anticipate growth until overall market conditions show consistent stabilization. Although the industry will continue to lag, we remain focused on research and development efforts which allowed us to introduce several exciting new products in recent weeks. This includes our G3000 touchscreen, glass cockpit for the Part 23 turbine market. Launch platforms for the G3000 include Honda Jet and Piper Jet. In addition, we introduced the Aera™ series that combines aviation and automotive navigation features in a portable product. With these introductions, Garmin clearly remains at the forefront of innovation and advancement in the avionics industry.
The marine segment posted third quarter revenue growth of 3% over the same quarter of last year. While the general marine market remains down, we are outperforming our competitors on the strength of our marine product lineup and believe that we are gaining market share in the marine electronics industry. We were excited to recently announce our OEM relationship with Regal. Over two dozen 2010 Regal boat models will be offering Garmin electronics as standard selections on the equipment list. This relationship further validates our push into the OEM portion of the marine industry. While we do not expect to post significant growth in this segment until the macroeconomic conditions improve, we do expect that year-over-year revenues have stabilized in the near-term.”
Financial overview from Kevin Rauckman, Chief Financial Officer:
“Our financial results for the third quarter highlight our commitment to managing our business efficiently during periods of ongoing revenue decline and the reward of earnings per share growth,” said Kevin Rauckman, Chief Financial Officer of Garmin Ltd. “While our revenue during the quarter fell 10% on a year-over-year basis, we posted pro forma earnings per share growth of 17% as we sustained our strong gross and operating margin performance from second quarter 2009.
Gross margin for the overall business in the third quarter was 52% with all segments, excluding outdoor/fitness, posting year-over-year margin improvement. The automotive/mobile segment gross margin was most improved at 48% compared to 38% in the third quarter of 2008. Improvement was driven by moderation in year-over-year average selling price decline, foreign currency fluctuations and continued benefit from material cost reductions. Gross margin for the marine segment also improved materially when compared with the year-ago quarter from 49% to 54% due to product mix and material cost reductions.
Operating margin increased to 30% in the current quarter from 25% in the year-ago quarter. The operating margin improvement occurred in the automotive/mobile and marine segments driven by the gross margin improvements. Total operating expenses increased by $2 million on a year-over-year basis. We reduced advertising expenses by $5 million, or 10%, while other selling, general and administrative expenses increased by $4 million, or 5%. Research and development costs increased by $3 million, or 5%, when compared to the year-ago quarter as we continue to hire engineers to support our product initiatives.
We also generated $281 million of free cash flow in the third quarter of 2009, resulting in a cash and marketable securities balance of just over $1.8 billion at the end of the quarter.”
Non-GAAP Measures
Pro Forma net income (earnings) per share
Management believes that net income per share before the impact of
foreign currency translation gain or loss and other one-time items is an
important measure. The majority of the Company’s consolidated foreign
currency translation gain or loss results from translations involving
the Euro, the British Pound Sterling and the Taiwan Dollar at the end of
each reporting period of the significant cash and marketable securities,
receivables and payables held in U.S. dollars by the Company’s various
subsidiaries. Such translation is required under GAAP because the
functional currency of the subsidiaries differs from the currency in
which various assets and liabilities are held. However, there is minimal
cash impact from such foreign currency translation. Accordingly,
earnings per share before the impact of foreign currency translation
gain or loss allow an assessment of the Company’s operating performance
before the non-cash impact of the position of the U.S. Dollar versus
other currencies, which permits a consistent comparison of results
between periods. The 2008 gain on sale of TeleAtlas N.V. shares is also
excluded below as a one-time item.
