GARMIN INTERNATIONAL, INCORPORATED Moderator: Min Kao ... · growth of 34% in the quarter. We also...

GARMIN INTERNATIONAL, INCORPORATEDModerator: Min Kao

02-09-05/10:00 am CTConfirmation # 3256928

GARMIN INTERNATIONAL, INCORPORATED

Moderator: Min KaoFebruary 9, 2005

10:00 am CT

Operator: Good morning, my name is (Christie) and I will be your conference facilitator

today.

At this time I would like to welcome everyone to the Garmin Fourth Quarter

Earnings Release conference call.

All lines have bee placed on mute to prevent any background noise.

After the speaker’s remarks, there will be a question and answer period. If

you would like to ask a question during this time, simply press star then the

number 1 on your telephone keypad. If you would like to withdraw your

question press star then the number 2 on your telephone keypad.

Thank you. Ms. Schwerdt, you may begin your conference.

Polly Schwerdt: Thank you. Good morning, we would like to welcome you to Garmin

Limited’s 2004 Fourth Quarter Earnings call.



Please note that a copy of the press release concerning this earnings call is

available at Garmin’s Investor Relation site on the Internet at

www.garmin.com/stock.

Additionally this call is being broadcast live on the Internet and a replay of the

Web cast will be available until March 4, 200.

A telephone recording will be available for 24 hours after the call and a

transcript of the call will be available on the Web site within 48 hours at

www.garmins.com/stock under the Events Calendar tab.

This earnings call includes projections and other forward-looking statements

regarding Garmin Limited and its business. Any statements regarding our

future financial position, revenues, earnings, market shares, product

introductions, future demand for our products and our plans and objectives are

forward-looking statements.

The forward-looking events and circumstances discussed in this earnings call

may not occur and actual results could differ materially as a result of risk

factors affecting Garmin.

Information concerning these risk factors is contained in our Form 10-K for

the fiscal year ended December 27, 2003 filed with the Securities and

Exchange Commission.

Attend on behalf of Garmin Limited this morning are Dr. Min Kao, Chairman

and CEO; Kevin Rauckman, Chief Financial Officer; (Cliff) Pemble, Director

of Engineering and Andrew Etkind, General Counsel.



The presenters for this morning’s call are Dr. Min Kao and Kevin Rauckman.

At this time I would like to turn the call over to Dr. Kao.

Min Kao: Good morning. From the press release issued this morning, you can see that

we have just finished another year of record revenue and earnings.

Total revenue for the year increased 33% and earnings per share increased

15% relative to 2003.

Excluding the effect of foreign currency, earnings per share increased 22%

relative to 2003.

2004 was another good year for Garmin. There were many significant

accomplishments.

• We recorded our 14th consecutive year of revenue growth with 42%

growth in our aviation business and 31% growth in our consumer

business.

• Over 2.3 million Garmin products were shipped in 2004, raising our total

to over 10 million shipped to date, which is an exciting benchmark of the

strength of the Garmin brand.

• We delivered 15 new products in 2004, compared to 16 in 2003, and

experienced strong demand across all product lines. These products

include:

• A marine network system, which integrates our chartplotters,

sounders, XM satellite weather receivers and radar, filling out our suite

of higher-end marine network offerings.



• Three new handheld product lines with beautiful, yet very power-

efficient color displays for outdoor recreational users.

• A number of new wearable products, which further expand our sports

and personal fitness product offerings, and

• Several new automotive products, include in the Quest, a pocket-sized,

full-featured product at a sub-$600 price tag.

We completed certification of our G1000 integrated cockpit for a total of six

aircraft models: the Cessna 182 and 206, Diamond DA40 and DA 42 and

Mooney Ovation2 and Bravo. Superb coordination effort with these aircraft

manufacturers also enabled us to bring the benefits of this revolutionary

system to several hundred pilots in the short few months before the end of the

year.

We feel that we accomplished a lot in this past year but this does not come

without challenges. As you may remember, we experienced margin erosion

during the first half of the year due to component cost increases and a record

number of product transitions. We also experienced severe product

delivery problems due to component shortages and manufacturing capacity

constraints, arising from the record number of new products that were

introduced. But I’m pleased to report that, with much hard work and

additional investment in people and equipment, we have overcome most of the

challenges. We were able to meet most of the product demands in the fourth

quarter and we have additionally replenished our inventory to meet the

anticipated demands for the coming marine and spring season.

Our continued business strength enable us to undertake a number of important

growth initiatives in this past year, which includes:



• The completion of our $(65) million facility is finished in (unintelligible),

Kansas and also the airport hanger expansion at our Oregon (AT)

division.

• The addition of manufacturing capacity in our Taiwan facilities. We

responded to the product demand challenge by increasing the number of

manufacturing lines from eight at the beginning of 2004 to the current

number of twelve, with two more to come in March, and an increase in the

number of manufacturing associates from 800 to around 1,100.

• In addition, there are over 400 new associates company wide, including 50

new engineering associates, bringing our research and development group

to over 560, and to nearly 2,500 total employees worldwide.

• The completion of our Phase 1 implementation of Oracle’s ERP

(Enterprise Resource Planning) system, which provides improved

integration of Garmin’s major business units in Taiwan, UK and the US.

2005 Outlook

As we go forward, in 2005 we anticipate another year of excitement and

success. Consumer awareness and interest in GPS technology continues to

grow, and we have been investing in R&D to take advantage of the

opportunities in both existing and new markets. We expect to introduce over

60 new products in 2005. Products recently announced at the Consumer

Electronics Show, including a Pocket PC version of iQue, a new ForeRunner

with integrated heart rate monitor, and also the very attractive C-series Street

Pilots, have been well received. Two years ago we announced a relationship

with the MOPAR division of DaimlerChrysler, which allows Daimler to

install a custom designed Garmin product on six models of Chrysler, Dodge

and Jeep vehicles. While this is only a small step in our pursuit of the



automotive installed market we are excited by this achievement and are

continuing to explore additional opportunities.

On the aviation side, we look forward to delivering several new products

including weather and radar, and we expect to complete certification of the

G1000 cockpit in additional aircraft models in 2005. In addition to the

Cessna, Diamond, and Mooney shipments that have already begun, we

anticipate certification completion and shipment of G1000 avionics for the

Raytheon Bonanza and Baron, and the Cessna 172 this year. We are also in

ongoing discussions with other aviation OEMs, and hope to have more

progress to report throughout the year.

Summary

In summary, we are pleased with our 2004 results and look forward to another

year of growth in 2005. The demand for our large portfolio of products

remains strong, so we believe Garmin is well positioned to take an advantage

of the opportunities the future offers.

Since the formation of the company, our quest has been to become a global,

world-class supplier of communication, navigation, and information devices.

Toward that goal, we work hard to grow our business through continuous

product innovation, expanding and broadening our target markets and

extending the Garmin brand. I feel that we have been achieving that goal by

consistently delivering over 20% of annual growth. We will continue to

maintain our focus on this winning strategy.

As a final note, I would like to take this opportunity to thank all of our

employees, customers, suppliers, investors, dealers and distributors for

making 2004 another successful year for Garmin. We are very grateful.



With that, I would like to turn the call over to Kevin to discuss our financial

results and the fiscal year 2005 guidance. Thank you.

Kevin Rauckman: Thank you Min and good morning to everyone. As has become customary,

I’d like to focus my comments this morning on the fourth quarter results, also

looking at the full year actual results and then concluding my presentation

with expectation on the upcoming 2005 year. So let’s get going on the 2004

fourth quarter.

The fourth quarter revenue results were $229 million, which was above our

range of our guidance earlier of $200 to $204 million, and that’s a 30%

increase from the year-ago quarter.

You probably saw from the press release that we experienced growth across

all global regions. North American revenue was $164 million in the fourth

quarter, which is up 26% from $130 in Q4 of ’03.

European revenue was $47.8 million, a 41% increase. Asian revenue was

$9.1 million, up 49% from $6.1 million last year.

Our gross margin during the quarter decreased 140 basis points to 54.7% from

56.1% in the fourth quarter of ’03. However, the 54.7% was just above our

earlier guidance of 52% to 54%.

Operating margin was 36.1% compared to 36.8% in fourth quarter ’03, 90

basis points below our earlier guidance of 37% to 38%, net income $47.6

million however excluding the foreign currency loss we experienced net

income of $68.5 million, significantly exceeding our guidance of $47 to $49

million.



Therefore, our earnings per share results for the quarter were 44 cents.

Without the effects of foreign currency loss, we came in at 63 cents per share.

That’s a 34% increase from the year-ago quarter and it exceeded our earlier

guidance of 50 to 54 cents, the total top line growth of 30% and bottom line

growth of 34% in the quarter.

We also experienced a significant increase in our units sold during the quarter,

up 21% to 718,000 units, compared to 591,000 total units in the fourth quarter

of ’03.

As I mentioned, we reported gross margin of 54.7% compared to 56% - 56.1%

in the fourth quarter of ’03, above our earlier guidance.

We continued to experience the strong acceptance of our new products. In the

fourth quarter, approximately 43% of our sales were generated from products

introduced within the last 12 months.

This has now been the third consecutive quarter where this metric has been

above 40%.

Looking at the operating margin, for the fourth quarter our operating margin

was $79.8 million, a 36.1% of sales, again just below our earlier guidance of

37% to 38%.

Operating margin did decrease 70 basis points compared to the fourth quarter

of ’03.

During Q4 SG&A as a percentage of sales decreased 90 basis points to 10.4%.

Overall the dollar increase was 20% over the fourth quarter of 2003 during a

period where our revenues were up 30% and this 20% increase is driven



primarily by increased advertising as we expected during the holiday season,

(Oracle) consulting costs, increase call center expense as we’ve continued to

expand our call center to support our aftermarket product and a one-time

patent license fee.

R&D increased 10 basis points to 8.1% of sales from 8.0% a year ago. Our

R&D dollars increased 32% over the prior period. This increase came

primarily due to the hiring of new engineering staff and also an increase in our

overall engineering program costs.

During the quarter, we hired four new engineer and engineering associates and

now we employ a total of 567 engineers around the world.

So overall our total operating expense as a percentage of sales decreased 70

basis points to 18.6% of sales from 19.3% in the prior year period.

I’m sure you all noticed that we experienced a $25.3 million foreign currency

loss during the fourth quarter as the US dollar continued to weaken compared

to the Taiwan dollar.

At the end of September of 2004 the Taiwan dollar exchange rate was 33.99

however at the end of 2004 that rate was 32.19, a 5.3% change.

The majority of the company’s consolidated foreign currency translation gain

or loss results, from translation into new Taiwan dollars at the end of each

reporting period of the significant cash, receivables and payables held in US

dollars by the company’s Taiwan subsidiary.

This translation is required under GAAP because the functional currency of

our subsidiary is new Taiwan dollars. However, there is minimal cash impact



from this foreign currency translation and we expect that the Taiwan

subsidiary will continue to hold the majority of its cash in US dollars.

Our interest income during the fourth quarter came in at $3.1 million, an

increase over prior quarters. We’re currently earning approximately 3.1%

pretax return on our marketable securities and approximately 2.1% on our

total cash balances on our consolidated basis.

The effective tax rate during the fourth quarter was 17.3%. It came in below

our earlier guidance of 20% and 370 basis points lower than the fourth quarter

of ’03 which was 21.0%.

This year-over-year change was caused by the favorable tax rate during Q4

2004 that resulted in our overall rate during the year of 19.4% during the full

year of ’04.

We expect that our effective tax rate for 2005 will remain at approximately

19%.

Moving next to the segment information. Fourth quarter consumer segment -

consumer revenue was $173.7 million and represented a 27% increase over

the prior year quarter.

Consumer segment was 79% of our total revenues and this is now the 13th

consecutive quarter of year-over-year revenue growth in excess of 20%.

When you break down the consumer segment we experienced growth across

most consumer product lines but especially within the automotive and

recreational product lines, a continued demonstration of demand for our

consumer GPS products.



Again, our total unit sales were up 21% during the quarter and unit growth

occurred in both the consumer and the aviation segments.

Our consumer gross margin decreased to 52.7% in the fourth quarter from

54.2% in the year-ago quarter.

Consumer gross margin reduction was driven primarily by unfavorable

product mix within the quarter.

Our operating margin within the consumer segment decreased 170 basis

points to 36.6% from 38.3%. This was driven by the reduced gross margin as

expected for the holiday season and additional R&D expenses.

We saw continued strength in the aviation segment. As Min mentioned, our

revenue during the quarter increased 42% to $47.2 million compared to $33.3

million in Q4 of ’03.

Our aviation segment accounted for 21% of our total revenues and the revenue

increase was due to the continued shipments of our new (G1) - newer (G1000)

cockpit as well as strong handheld aviation product sales during the quarter.

The aviation gross margin decreased to 61.9% from 64.2% in Q4 of ’03. This

was due primarily to the product mix during the quarter made up primarily of

chances with increase in (G1 1000) cockpit sales.

Our operating margins for the aviation segment were 34.3%. That’s actually

an increase of 330 basis points compared to 31% during the fourth quarter of

’03. This increase is due to the reduced gross margins that were more than



offset by reduced R&D and SG&A expenses as a percentage of sales within

the aviation segment.

And finally for the fourth quarter, I want to talk about cash flow. The cash

flow from operations during the quarter was $57.5 million. Fresh cash flow

generated was $37.2 million. Again we define that as operating cash flow less

CAPEX.

Cash flow from investing during Q4 of ’04 was at $31.4 million in (USO)

cash. Cash flow from financing activities a 49.0 million use of cash primarily

made up of our dividend payment we made during the fourth quarter.

Capital expenditures for the fourth quarter were $20.3 million. As I

mentioned, Garmin Limited paid a 50 cents per share dividend on December

15. Total use of cash was $54 million.

Moving next to the overall fiscal year 2004 financial results, 2004 revenue

was $762.5 million, a growth of 33% over 2003.

Our gross margin decreased to 53.9% compared to 57.7% in 2003.

Operating income was $270.7 million and our net income after tax was $205.7

million.

Operating margins decreased to 35.5% compared to 39.6% in the year - in

2003.

Our GAAP diluted EPS were $1.89 which compares to a $1.64 in 2003,

representing a 15% increase in earnings per share.



The (FX) loss during 2004 however was $24.8 million therefore the earnings

per share results excluding the (FX) of foreign currency were $2.07,

representing a 22% increase compared to 2003.

So in summary, our top line growth was 33%, EPS growth of 22% during the

year.

We saw strong sales across all global regions. North American revenue

during the full year was $531.5 million, a 28% increase.

European revenue continued to expand $196.9 million for the full year, up

48% over 2003.

And our Asian revenue was $34.1 million, a 35% increase over 2003.

Consumer revenue of $591.0 million during the fourth quarter or during the

full year represents a 31% increase over fiscal year 2003. For the full year,

our consumer segment made up 78% of our total revenues.

The consumer gross margin decreased to 51.5 from 56.0 in 2003 due to

unfavorable product mix and other cost of sales increases during the year,

such as warranty cost, freight and license fees.

Our aviation revenue was $171.5 during the fiscal year 2004, which was a

42% increase compared to 2003. Aviation made up 22% of the total revenue

and the aviation gross margin decreased to 62.4 from 64.2 in 2003, due

primarily to the introduction of the (G1000) cockpit during ’04 and a higher

aviation OEM content that we experienced during the year.



Overall, both total and consumer aviation units combined increased up to

$2.306 million from $2.066 million, which is an increase of about 12% on unit

growth.

Fiscal year 2004 operating profits, as I mentioned, were $270.7 were 35.5% of

sales compared to 39.6% in ’03.

During the full year our SG&A as a percentage of sales was flat at 10.4%

compared to 10.4% last year.

Because we had - Garmin (AT) in just the last four months of 2003, we looked

at SG&A cost and R&D cost excluding Garmin (AT). SG&A expenses

increased 29% for the full year excluding (AT). Including (AT), SG&A

expenses increased 32% over fiscal year 2003.

Our R&D overall increased to 8.1% of sales from 7.6% of sales during 2003

due to the hiring of 52 engineers during the year.

Excluding our Garmin (AT) business R&D expenses increased 27%.

However including Garmin (AT) the overall R&D expense increased 41%

over fiscal year 2003.

We also experienced much like we had in the fourth quarter, a $24.8 million

foreign currency loss during the full year ’04 as th US dollar weakened versus

the Taiwan dollar. The rate at the end of ’03 was actually 34.05 and at the end

of ’04 a 32.19, a 5.5% reduction.

Our interest income was $9.4 million for the full year.



Moving next to the balance sheet, our cash and investments at the end of the

year amounted to $573.6 million, marketable securities made up $322.2

million of this total cash position.

Our accounts receivable balance came in at $110.1 million at the end of ’04.

This represents an increase of $27.4 million from $82.7 at the end of ’03 due

to strong 2004 sales.

When we looked at the shipment linearity during the fourth quarter of ’04 it

was roughly the same as 2003 therefore we ended the year of ’04 at 53 DSO

compared to 51 DSO at the end of 2003.

Inventory increased to $155 million at the end of the year of 2004, up from

$96.8 million at the end of 2003.

The increase in inventory was primarily due to increase in finished goods and

raw materials as we meet anticipated demand for our products during 2005.

Days of sales in our inventory balances were 161 days compared to 145 days

at the end of ’03.

Garmin continues to evaluate the adequacy of our inventory reserves given

increased demand and feel that we have appropriate reserves on the books at

the end of 2004.

So overall our balance sheet remains strong and positions us well for future

growth.



Our fiscal year 2004 cash flow, we came in at cash flow from operations at

$204.1 million during the year. Free cash flow generated was $126.0 million.

Cash flow from investing for the full year was $184.3 million in (USO) cash.

Cash flow from financing was $51.1 million in (USO) cash, again primarily

due to the dividend payment.

And the capital expenditures that we had for the full year were $78.1 million,

made up primarily of the (Olasis), Kansas facility expansion that we

completed at the end of the year.

Finally I’d like to end on guidance numbers for both first quarter and full year.

As you noted in the press release, due to the desire to focus more on long-term

results of the company, we decided to discontinue the practice of specific

quarterly revenue margin and EPS guidance.

We will however continue to provide annual guidance and update those

expectations on a quarterly basis.

We will provide general demand outlook and trends for the current quarter.

With that in mind, our expectations for Q1 2005 include continued top line

growth of nearly all product lines due to the recent introduction of many new

consumer and aviation products.

And while competition has increased, our view of the near term is still strong

given the acceptance of many of these new products that were released both at

the consumer electronics show and prior.



For the full year, the guidance that we put in the press release and expect for

the fiscal year 2005, top line revenue range of $890 million to $915 million

which represents a 17% to 20% growth.

We expect gross margins to be between 52% and 54%. You recall we ended

the full year ’04 as 54% roughly.

Our operating margins were - will be 33% to 34% expected. As I mentioned

earlier, we think the effective tax rate will be 19% for the full year of ’05.

This derives a net income within the range of $250 to $260 million, excluding

any possible foreign currency effects. And the EPS range will be $2.30 to

$2.38, excluding any (FX) effect. This represents an 11% to 15% growth and

its based on an outstanding diluted share count of 109.3 million shares.

The guidance we did release this morning in the press release includes a 5

cents per shear impact due to the expensing of stock options and our employee

stock purchase plan in the back half of 2005.

And finally our capital expenditure estimate for the full year is $25 million

now that we’ve completed the large facility expansion here in Kansas.

So that concludes my presentation for the morning. I’d like to at this point

turn it to any questions you all may have.

Operator: At this time, I would like to remind everyone, in order to ask a question please

press star 1 on your telephone keypad.

We’ll pause for just a moment to compile the Q&A roster.



Your first question or comment comes from the line of (John Buker) with

(Harris Nesbitt).

(John Buker): (John Buker) here at (Nesbitt). A question for you all on capacity planning -

could you indicate what utilization rate that you were operating at at the end

of 2004 with the new production facilities that you have brought up by then?

And then also provide some background as to your plans for increasing

production capacity in 2005 as you alluded to that there would be some

expansion here and whether at the end of the 2005 you can give an idea in

terms of, you know, percent increase in capacity or actual, you know, unit

volume increase and what sort of target utilization rate that you’re targeting.

Thank you.

Min Kao: (John) this is Min. Our utilization rate of our Taiwan capacity was at 110% at

the end of 2004. The main reason is to get caught up with our Christmas

demand and also to build up sufficient level of (unintelligible) stock as we

enter the marine and spring season.

Our capacity at this time, you know, again this depends - is a function of the

product mix but our existent capacity is approximately 3.5 million units a

year, including some over time.

(John Buker): Three point five million units is the current production capacity?

Min Kao: Yeah, including some overtime.

(John Buker): Is there a range that you might be able to provide for what you’re targeting for

for the end of this year?



Min Kao: Well I think that I reported - as I stated in my report that we would have two

additional lines coming in March so they’ll be all full capacity - 3-1/2 million

isn’t what our (unintelligible) factory is capable of producing.

(John Buker): Okay and then there’ll be two additional lines would provide a commensurate

volume increase on top of that?

Min Kao: No that includes.

(John Buker): That includes that?

Min Kao: Yeah that includes the two lines, yes.

(John Buker): Okay and then next question and I’ll yield the floor. Can you indicate what

sort of production ramp you’re expecting in the automotive units that will be

shipping to (Mopar), provide any sort of, you know, rough timing on that and

then how you expect the unit volumes to ramp over time? Thank you.

Min Kao: We really cannot speculate on the (integrity) of the system. Any numbers

probably need to come from (Mopar). But seeing as this will be the least

expensive in (unintelligible) our variables so we hope that we been

(unintelligible) with it.

(John Buker): Thank you.

Min Kao: Thank you.

Operator: Your next question comes from the line of (Bill Benton) will William Blair.

(Bill Benton): Good morning guys.



Man: Hey Bill.

Min Kao: Good morning.

(Bill Benton): Just if you could - I know Kevin you had mentioned that the quarter was

relatively linear in terms of shipments. Could you remind us relative to last

year - could you kind of talk about was it more back end load? I guess you

didn’t say it was linear. You said it was a similar pattern.

Kevin Rauckman: Yes.

(Bill Benton): Could you talk about kind of what pattern was and what the inventory - your

view of the inventory looks like in the channel right now.

Kevin Rauckman: Okay. Yeah, as I mentioned, the linearity was similar to ’03 and if you look -

if you recall what we talked about in ’03 is that we had a slow start and then

we really ramped up in November and December. So many of our sales that

we got in December obviously would not be collectible until January and

that’s what drove the 53 DSO but again very similar to what we experienced

in ’03.

(Bill Benton): Great.

Kevin Rauckman: And as far as the inventory channel, to the best of our knowledge we really

haven’t seen much difference there. W feel like a channel is relatively clean.

We haven’t seen an increase in inventory by any means and the products that

we’ve released - the new products we’ve released have bee pretty well

received and have sold through pretty well.



(Bill Benton): Okay and I like your new series - (C) series by the way but - and with that

comes the question of what are you doing kind of I guess with that - with the

high-end (3)? I’ve been kind of just searching the Web here and seeing a little

bit of discounting on and I wonder if some of you retailers are looking to add

that on the shelf next to it or are they looking to maybe phase out the higher-

end one and come in with maybe the lower price (C) series.

Min Kao: Well it really depends on which of your (unintelligible) you talk to and some

retailers indicate that they (unintelligible) both the high end and the mid-range

products.

(Bill Benton): Okay so kind of a mix as you’re seeing it right now?

Min Kao: Yes, that’s what we have been told by some major retailers.

(Bill Benton): Okay and then just a final question on (Mopar) as well. I guess, you know,

there’s been a little bit of confusion on (Harmon) announcing that they were

going to be doing with Chrysler starting in 2007. Is - can you maybe help

alleviate some of that confusion and can you maybe discuss a little bit - I

know you maybe discuss a little bit. I know - are the profitability metrics

around the (Mopar) solution, should we think about that as similar to what

you’ve commented in the past on an (OE) type solution?

Min Kao: Well we really cannot comment on (Mopar) trends so (unintelligible) from

(Mopar). But all I can say is that we are excited by this relationship and look

forward exploring additional opportunities. As far as the profit margin is

concerned that certainly we won’t be - we are not able to achieve 50% margin

for this kind of OEM relationships.



(Bill Benton): Okay. Okay but we should think about it in terms of what you maybe in the

past you have said on (OE) relationships?

Kevin Rauckman: Yeah I think it’s within that range, yes.

(Bill Benton): Within that range. Okay well great guys, thanks.

Kevin Rauckman: Thank you.

Min Kao: Thank you.

Operator: Your next question comes from the line of (Ron Epstein) with Merrill Lynch.

(Stephanie Lang): Hi, this is actually (Stephanie Lang) calling for (Ron) and I actually just had a

couple of questions. Can you comment on the ASPs that are excluding

(avionics). I just kind of wanted to see a trend of where the selling average

prices are without kind of the G1000.

Kevin Rauckman: Well since the vast majority of our units come from the consumer business,

the fourth quarter ASP came down from the prior quarter, from (355) down to

(308) and that still was higher than the fourth quarter of ’03 and I think it

speaks to the fact of the types of products and the mix of products that we

were selling. Again, we have tried to focus your attention way from ASPs

because so much of it has to do with these - the product mix and the number

of which products are being sold. So as we expected we thought during the

fourth quarter because many of our sales are at lower price points for the

holiday season, we would see a reduction in ASP during Q4 of ’04.



(Stephanie Lang): Okay thanks. Also, once more question, the OEM manufacturers are seeing

kind of a pick up in the corporate jet market and I wanted to know kind of

what you’re seeing in the general aviation market.

Clifton Pemble: (Stephanie), this is (Cliff). I think there’s been a lot of increased awareness

and attention in the general aviation market, both in the jet area as well as the

piston type market so we’ve seen an increase in that amount of business.

(Stephanie Lang): So like for Q4 Cessna kind of commented that their single engine piston jets

kind of go over 40% year-over-year. Is that kind of the gross out you’re

expecting for the (G1000)?

Clifton Pemble: I think for 2005 we’ll definitely experience some good growth in (G1000). I

think there’s some pent up demand for new aircrafts because of the new

technologies being offered.

(Stephanie Lang): Okay, thank you.

Clifton Pemble: Thank you.

Operator: Your next question comes from the line of (Mark Roberts) with Wachovia.

(Mark Roberts): Thank you, good morning.

Man: Hi (Mark).

(Mark Roberts): If - could I - if I revisit the unit volume in the fourth quarter was there a

particular category of product or a particular product th drove the high year-

over-year unit sales?



Man: No, actually we saw - as I mentioned we saw strong growth across all - nearly

all product lines. About the only one where we didn’t see ans much growth

was in the (TDA) product because we had introduced the (IQ3600) late in the

year last year and had quite a bit of pent up demand there. So - but in general

we saw a unit growth across the aviation segment and in the most of the

product lines within the consumer segment.

(Mark Roberts): Okay and you had mentioned earlier in the year, earlier last year that you

anticipated that shortly the unit volume or at least the revenues from automatic

oriented products would equal or surpass marine oriented products. Did that

happen in the fourth quarter?

Man: I think we can confirm that that did happen in the fourth quarter.

(Mark Roberts): And should we anticipate going forward that now you’re largest dollar volume

category will be automotive.

Man: No I don’t think you can conclude that. Our recreational product line I still

the largest and appears to be - will continue although we expect a nice growth

within the automotive product line.

(Mark Roberts): Okay so - and so - there doesn’t - they’re margins were up a little bit so can

we conclude - you had mentioned earlier last year that the automotive

products generally had somewhat lower gross margins. Is that still true?

Man: I think that’s still true. It’s just that w had a lot of growth from other products

outside the automotive product line, including aviation.

(Mark Roberts): Okay. Those were all my questions. My other questions have been answered.



Man: Thanks Mark.

Man: Thanks.

Operator: Your next question comes from the line of (Benjamin Windler) with Morgan

Stanley.

(Benjamin Windler): Hey good morning guys.

Man: Hey Ben.

Min Kao: Good morning.

(Benjamin Windler): Kevin I was just want to go back and revisit the comments that you guys

made up front and then in last years results Min spoke to the margin

(unintelligible) the first half of last year and sort of how you guys have

alleviated a lot of the short - potential shortages on components and capacity.

Is that how I - we should look at the inventory growth in the fourth quarter

that effective what you have there is a lot of raw materials so you’re ready and

you don’t have any kind of issue with a big surge in demand in color displays

and flash which might have been in shortage quantities last year. You’ve

already got that sort of taken of, is that the way to look at it?

Man: Yeah I think when you look at our inventory possibly it’s always been

(unintelligible) that we’d try to keep at least 60 days of finished goods on and

to be able to respond to customer demand. And if you look at the breakdown,

right now we have between 60 and 75 days of finished goods and most of that

is in - on the newer products so we feel like there’s very low risk there.

However I think the increase - some of the increase were within raw materials

in some of our assemblies.



(Benjamin Windler): Yep.

Man: And would admit that we need to do a better job there of working that through

the production process over the next six months and that’s really what we’re

working on right now.

(Benjamin Windler): Got it. That makes sense. Thanks. And then if I could just ask one sort of

more big picture question. A couple of years ago you guys had sort of talked

about the wireless opportunity in GPS cell phone. I think you had launched

something in Europe but then sort of back away from it. Any updates there in

terms of the opportunity, whether you’re focused on it, is it part of the plans in

’05?

Man: Well we have interest in what’s going on in the wireless market. There has

been a lot of change since we stopped focusing on devices and started to look

at possible applications. For example, our (GPS 10 Blue Tooth) module.

(Benjamin Windler): Okay so we’ll probably hear more on that front in the current year.

Man: Yes, correct.

(Benjamin Windler): Great, thank you very much.

Man: Thank you.

Min Kao: Thank you.

Operator: Your next question comes from the line of (Ken Suffy) with Thomas Weisel

Partners.



(Ken Suffy): Thank you, good morning.

Man: Good morning.

(Ken Suffy): Historically you guys have provided a little color on the actual slip between

raw materials and work in process and finished goods and inventory. Can you

do that for us this quarter?

Kevin Rauckman: Well I think as I just mentioned, we saw increases of all of those components.

And I feel like again - I feel like the finished goods is in pretty good shape of

raw materials due to the decision to bring on more parts in order to not get

short. In the fourth quarter and into the marine and spring season we have

seen an increase of raw materials over the Q3 of ’04.

The raw material number is approximately - let’s see, over the quarter we saw

about a 17 - $16 million increase on raw materials and finished goods was

about $15.

(Ken Suffy): Okay. Thank you. And has your inventory situation changed dramatically

since the end of Q4 as we look at it right now?

Kevin Rauckman: I think it’s too early to tell. We’ve only had a few weeks of shipment but in

general I think we’re still working through the inventory levels and as I

mentioned raw materials and assemblies in particular. I’d probably categorize

it as a not a significant change at this point.

(Ken Suffy): Okay. And then on the capacity issue, any update on the search for additional

space in Taiwan?



Min Kao: Actually, for us three to five years, a lot of plan. We have started the process

of looking at the additional facilities for this expansion. But so far we have no

identified any (site).

(Ken Suffy): Min, when do you hope to have that resolved?

Min Kao: Well I guess (unintelligible) we continue to, you know, that the - as you know,

in Taiwan, you know, it is not, you know, it’s not easy to find a size which is

convenient to where you are and our top ten (unintelligible) has been for size

which is (unintelligible) facility but so far we have not had any

(unintelligible).

(Ken Suffy): Okay. Thank you.

Man: Thanks.

Operator: Your next question comes from the line of (Peter Freetland) with

(unintelligible).

(Peter Freetland): Hey guys, a couple of questions. First just on your revenue growth or your

revenue outlook for ’05, can you just give us an idea how that would break

down consumer and aviation? Should we expect them to both grow at the

same rate or (unintelligible) over here?

Kevin Rauckman: Yeah, the way we look at it, you know, we had - earlier we had hoped that

we’d see similar growth, you know, let’s say 20% of between both but

actually it looks like given the aviation business, we’ll probably see a little bit

above 20% in aviation, a little bit below 20% for the consumer segment.

(Peter Freetland): Okay.



Kevin Rauckman: That’s what we have in our forecast right now.

(Peter Freetland): Okay and then I know you guys aren’t giving any Q1 guidance but should we

expect the same kind of seasonality that you usually experience coming out of

that holiday season?

Kevin Rauckman: Yes, it would be sequentially down. We would say that but I’m really not

going to give any specific numbers.

(Peter Freetland): Okay. Okay, thanks guys.


Operator: Your next question comes from the line of (Jeff Evanson) with (Darby and

Company).

(Jeff Evanson): Thank you. I was wondering if you could us some sense of the mix in the

aviation segment between OEM and aftermarket in the quarter.

Kevin Rauckman: Not prepared to quote an exact number but historically we’ve seen about 20%

of our aviation business with OEMs and we’ve definitely, given the (G1000),

we saw that increase during the - both the quarter and the year.

(Jeff Evanson): Okay. As you’re moving into some maybe a little bit different markets, a little

bit broader consumer markets than you’ve had in the past with emphasis on

PDAs and automotive, how do you expect that’ll change the amount and

nature of marketing spending in ’05?



Kevin Rauckman: That’s always a challenge to forecast. We do have an advertising budget

which is somewhat fixed due to media and then another component of that is

due to cooperative advertising which is more variable in nature so given the,

you know, given the expected 20% top line growth at the high end of our

range, we’d expect, you know the SG&A or amortizing dollars to increase at a

similar rate.

(Jeff Evanson): Might we see more -- excuse me -- less coop and more media as a result of

this shift?

Kevin Rauckman: I think we’re looking at both but I think that could happen yes.

(Jeff Evanson): Okay. And then a last follow-up on the (Mopar) deal. Obviously you have

ambitions beyond what you announced a couple of weeks ago. Are those

ambitions within Daimler Chrysler, outside of that manufacturer or both and

maybe what kind of benchmarks are you looking towards for (tape) rates to

expand those relationships?

Kevin Rauckman: Well we continue to look for opportunity. We don’t have anything specific

we can share with you at this time but we are really thrilled with the initial

relationship with (Mopar).

(Jeff Evanson): Okay thank you.


Operator: Your next question comes from the line of (Connel Modocar) with Lehman

Brothers.



(Connel Modocar): Hey guys, a question on average selling prices - given the competition is

increasing and we have seen a general trend, at least on the reseller level that

prices are trending down, how should we se average selling prices for Garmin

in ’05, both with and without aviation?

Kevin Rauckman: Well if you recall we had seen actually ASPs increasing during the year, up

until we got to the fourth quarter so at this point it’s really hard to forecast

given the product mix but I wouldn’t expect a significant difference on the

overall ASP than we had for the year.

(Connel Modocar): ASPs in ’04 really increased because of the new (unintelligible) product

line that you have - the color screens and things like that…

Kevin Rauckman: Right.

(Connel Modocar): And plus the PDAs selling for the whole year and as well as the (G1000)

being there, at least during the second half?


(Connel Modocar): But in general one would expect that they would trend down. It you

exclude aviation, how will you see ASPs?

Kevin Rauckman: Same answer. I think we have (60) new products coming out in ’05 and we,

you know, now that we’re going to be adding color screens because we

already them in most cases last year but we don’t anticipate a significant

reduction in ASP.

(Connel Modocar): Okay, thanks.




Operator: You have a follow-up question or comment from the line of (Bill Benton)

with William Blair.

(Bill Benton): Right, hey guys just - and could you talk about maybe any component pricing

break you’ve seen or what’s going on in the component pricing side?

Min Kao: We are literally - we really have not seen much movement overall.

(Unintelligible) process for some complements not just that a fresh memory

our low to date but on the other hand due to the variation of the US dollars

relative to all Asian currencies, many components from Asia surprise actually

more expensive than a year ago so overall, you know, we just don’t see any,

you know, (unintelligible) kind of significant move from one way or the other.

(Bill Benton): Okay and then you talked a little bit about your marketing budget. Would you

consider I guess looking at a car rental opportunity as more of a sales and

marketing type budget item rather than necessarily looking for a return on that

kind of from the sale?

Min Kao: Well (unintelligible) is not our top priority but frankly we have continued to

look into this market. We cannot provide anymore specific information at this

time but we are looking into the market.

(Bill Benton): You’re continuing to look there then?

Min Kao: Yeah.

(Bill Benton): Okay. And then I think Kevin you mentioned there as a one-time patent

license fee in the quarter, in the SG&A line?




(Bill Benton): Can you give any magnitude on how big that was?

Kevin Rauckman: It was roughly $1 million. I can’t really give you any specific details on it

though.

(Bill Benton): Okay, okay that’s great. Thank you.


Operator: You have a follow-up question or comment from the line of (John Buker) with

(Harris Nesbitt).

(John Buker): Yeah one other question related to raw materials and more component focused

also. You indicated that you had some room for improvement on the current

balance of raw materials. As you look out at component availability and just

some of the trends that you’ve seen and - or they’re expecting for 2005. There

was a fairly dynamic market in 2004 for a number of types of components.

You know, what are your expectations for 2005? Do you think it’ll be, you

know, more stable? Is there - are things more an equilibrium there or are you

expecting that there could be surprises as you look out this year? Thank you.

Min Kao: Well I have to say that these are (unintelligible) in 2004 we have taken a more

defensive approach (unintelligible) by (unintelligible) the high (unintelligible)

of critical parts. But at this point we don’t see any significant risk for

components this year. So around the line we must review our inventory

strategy and (unintelligible) down (unintelligible) inventory.



(John Buker): Thank you.

Operator: Your next question comes from the line of (Rich Salara) with Needham and

Company.

(Rich Salara): Kevin, on the R&D side, I think you mentioned you added four people during

the quarter, yet it was up sequentially quite significantly in dollar terms. Can

you just explain that and then say if you think that’s sort of the right dollar

level to think about as a baseline going forward?

Kevin Rauckman: Yeah what we saw even though we only added four, we definitely had - we

had brought on over 50 people during the year so we saw, you know, about

1/3 of that is just general costs, well actually almost about a half of that is just

general cost increase to salaries and benefits and the cost of R&D.

We also did see an increases in our Taiwan R&D which increased during the

quarter but in general, as far as looking forward, you know, we ended at about

8.1% of sales as I mentioned.

I think with a 20% growth rate we would still like to see R&D grow as a

percentage of sales, somewhere around, you know, 50 basis points could

possibly be the number in ’05.

(Rich Salara): Okay, that’s helpful. And then just with respect to the inventory, do you have

any targets in terms of inventory days for overall inventory? You know, what

is your sort of - how do you plan to manage that going forward?

Kevin Rauckman: I think it gets back to what our earlier comments were and that is, you know,

161 days is probably too high and we’re looking at reevaluating raw materials



and assembly part that go into the production process so we’d like to see that

come back down to a more reasonable level.

(Rich Salara): Okay thank you.

Operator: Your next question comes from the line of (Thomas Cappola) with (DGM

Management).

(Thomas Cappola): Hey guys, how are you? I appreciate you taking the time. I guess I don’t

understand the business maybe as well as others. I know you were stressing

not to focus on (AFPs) coming in and subsequent margin compression so what

should we be focusing on? You know, where is the turn there? What should

we be looking for?

Min Kao: Well our forecast on our revenue and EPS.

(Thomas Cappola): So how, you know, how I guess, you know, as you guys model internally

where do you see ASPs coming to? You know, is there an end to this or…

Kevin Rauckman: Well I guess I can’t add too much more other than we don’t expect a

significant change in ASP. You know, we had 50 new products last year. We

expect 60 in ’05 and there’s a lot of variability there, but in general not a

significant change in the market.

(Thomas Cappola): So you - so I guess continue to introduce new products even though ASPs

will continue to contract and try and make up in volume?

Min Kao: We are not sure that EPS will actually contract, you know, but like the

introduce more of the (unintelligible) products. The (unintelligible) product

tend to have a higher ASPs than are more handheld or personal fitness



products. So, you know, so in a way we are not quite sure that indeed

(unintelligible) is an ASP.

(Thomas Cappola): Right, okay. Okay thanks guys, appreciate it.

Min Kao: Thank you.

Operator: Your next question comes from the line of (Adam Rice) with (Koniko

Associates).

Man: Hello?

Man: Hello?

Man: Hello?

Man: Hello.

(Adam Rice): I’m sorry about that - my phone’s screwing up here. A question on the

inventory again and I’m sorry to beat a dead horse here. But you mentioned

that you all were evaluating the reserves and you - so you had enough on the

books. May I ask what the reserve number was in the quarter? Did it change

as a percent of total inventory in 4Q?

Kevin Rauckman: Well we’ll file that with the 10-K but as a percentage of total it actually came

down a little bit. It’s interesting though when you look at the types of

products that, as I mentioned earlier, we don’t have a lot of old inventory

sitting around in finished goods. It’s a lot of new product so therefore we

think the risk is very low as far as any kind of obsolescence in the future.



(Adam Rice): Okay and also I know you gave raw materials I think 15 million in the -

sequentially.

Kevin Rauckman: Yes.

(Adam Rice): And then finished goods up 15 million sequentially. May I ask, do you have -

also have a work in progress line or do you have - will you release that at

the…

Kevin Rauckman: Well it came up about $4 million.

(Adam Rice): Okay.

Kevin Rauckman: Which is the overall $35 million increase.

(Adam Rice): Okay and just may I ask why I’m not allowed to get the reserve number? I

mean that’s part and parcel of the…

Kevin Rauckman: Well I mean we - I guess I’ll go ahead and distribute that. It’s about 11-1/2

million.

(Adam Rice): Okay so - and thanks very much.

Kevin Rauckman: Yeah.

Operator: Your next question comes from the line of (Peter Freetland) with (Fulcrom).

(Peter Freetland): Hey guys. Just a follow up on…




(Peter Freetland): Just looking at the ’05 working capital would - how should we expect that to

trend just looking at accounts receivable and inventories? They’re a bit - you

had to put a lot of working capital towards those two areas in ’04 so just - and

roughly speaking what should we expect for ’05 for working capital?

Kevin Rauckman: Well I would say that, you know, we saw roughly a $60 million use of cash of

inventory. I would not expect to see that kind of a level in ’05. It should be

lower than that. I’m going not to give a specific number.

Accounts receivable on the other hand, if sales continue to increase like we

hope they do, that will continue to increase on an absolute dollar basis. So we

may not get much benefit on AR. So I would just classify it in general as

working capital improvement due to the inventory balances.

(Peter Freetland): Okay fair enough.


Operator: Your next question comes from the line of (Todd Nett) with (Constant Ford).

(Todd Nett): Good morning folks. Good - congratulations on a nice quarter and the great

year. I have a couple of questions. First of all, on the new products that you

guys are intending to introduce in ’05, I think you said 60. Can you break -

how many are going to be going into aviation and how many are going to be

in Marine and how many are going to be consumer? Could you break that

out?

Kevin Rauckman: Yeah (Todd) right now probably about 1/4 of those would be in aviation and

maybe less than 1/4 in Marine and the rest in consumer.



(Todd Nett): Okay. And then for those of us who are not as familiar with the financial

model at Garmin, can you just briefly summarize or kind of go over again the

margin implications of products sold at OEM, you know, as far as gross

margin, operating margin and, you know, verus that that is just sold, you

know, regular end market in both automotive and aviation?

Kevin Rauckman: Yeah I would say we’ve categorized in the past depending on what type of

OEM. The aviation OEMs are still 60% roughly, you know, 60% plus.

Automotive OEM on the other hand we’ve just - we have not given an exact

number. We said it’s definitely not at the corporate average of 50% on the

consumer side. After market would be kind of consistent with corporate

averages.

(Todd Nett): Okay and does - but on the OEM side does the operating margin levels come

out to about where the corporate averages today or where you’ve cited that

they’re likely to be in ’05?

Kevin Rauckman: No I’d say they would be lower given the R&D investment in those areas.

(Todd Nett): Okay and then one final question - on ASP declines, several questions

regarding ASP declines, how - what would you guys define - how do you

guys define the word significant? Is that down 25% and greater, down 20%

and greater, down 15% or greater? What does the - in your mind what is the

definite significant.

Kevin Rauckman: We don’t even use that word. We’re talking about ASPs.

(Todd Nett): Okay.



Kevin Rauckman: I would say it would, you know, but I don’t even know how to answer that

actually.

Min Kao: I think in a way that ASPs been on a (barometer) we try to manage I think that

is purely a result of the product mix.

(Todd Nett): Yeah.

Min Kao: And although I (unintelligible) in the margins, you know, certainly it’s just a -

is something we watch out closely but not ASP.

(Todd Nett): Okay. Yeah fair enough. Thank you.

Min Kao: Thank you.

Operator: Your next question comes from the line of (Barry Heiman) with (Stage Asset

Management).

(Barry Heiman): Good morning. I just had a -- or I guess we’re in the afternoon now -- a

question about the foreign currency, just to try to understand it a little bit. The

US dollar has been stronger recently which has been a change. If currencies

were to stay exactly where they are right now, would ’05 show a gain or a loss

and it would be - would it be minor or more material? Thanks.

Kevin Rauckman: I’d say in general this should be, you know, again if the rates stay the same

throughout the whole year there should be no impact. There should be no

foreign currency gain or loss. Unfortunately what we had last year was a

significant reduction or weakening of the US dollar and we had substantial

amounts of Taiwan assets that needed to be restate and that really hit us hard



in the fourth quarter but again, almost all of it is non-cash. It’s just a

restatement on the balance sheet.

(Barry Heiman): Right so to the extent that the US dollar has been strong year-to-date, in

theory if, you know, if we stayed where we were right now we’d be looking at

a gain then. Is that correct?

Kevin Rauckman: I don’t know - I think you’ve got to mainly got to look at a US dollar versus

Taiwan dollar and I don’t think that’s the case.

(Barry Heiman): Okay, got it now. Thanks.


Operator: Your next question comes from the line of (Herb Bookbinder) with Wachovia

Securities.

(Herb Bookbinder): Kevin, you’ve got $25 million in CAPEX which is way down and

obviously cash and cash flows should be good. Any comments on what you

might do with all the cash, the dividend of 50 cents last year, might you look

at doing substantially more this year? And are there any other long-range

capital projects that you have that might use up some of this cash?

Kevin Rauckman: Well I think we’re always evaluating opportunities whether it’s an acquisition

or investing in ourselves. You know, as Min talked about earlier in the

Taiwan strategy and improving or increasing production capacity over the

next three to five years, that’s an opportunity for us.

I really don’t - I think you can imagine, I don’t want to speculate on what we

do with our dividend strategy during the year.



(Herb Bookbiner):Okay. All right, thanks.

Kevin Rauckman: Thanks.

Operator: Your next question comes from the line of (Connel Modocar) with Lehman

Brothers.

(Connel Modocar): I’m sorry for the repeat question. This is more on the OEM opportunity,

do you guys see the need to be a bigger player in the auto electronics market

potentially having say been an audio capability or something else that you

need to do in order to get an entry into the market on a factory-install basis?

Kevin Rauckman: Well (Connel) we’re looking at all those kinds of opportunities and a lot of

that’s driven by the OEM themselves and what they’re willing to offer to us in

terms of opportunity.

(Connel Modocar): Do you think that not having the capability to do, you know, the rest of the

electronics is a potential handicap?

Kevin Rauckman: Well I think it depends on the car maker and their vision and the opportunity.

Certainly having those components is a better thing but so far we’ve been

exploring opportunities that hasn’t required it.

(Connel Modocar): Thank you.

Operator: Your next question comes from the line of (Todd Senek) with (Coscada

Capital).



(Todd Senek): I missed the majority of the call and I apologize for that but I just wanted to

address a few things. I noticed a lot of manufacturer rebates, you know,

through the holidays and I’m wondering what percentage of those rebates

typically come back to you and how that’s going to impact you in the next

quarter possibly as well?

Kevin Rauckman: Well first of all we’ve never made that number public. We - our typical

experience though is we have ongoing rebates whether it’s a $50 rebate or

$100 rebate but what we’re required to do accrue for any expected costs that

would come back in the next quarter. So I don’t expect due to what happened

in the fourth quarter that you’ll see any impact in 2005.

(Todd Senek): Okay. All right, I just wanted to get a clarification on that.

Kevin Rauckman:: Okay.

(Todd Senek): And then what about the inventories again? Can you break those down? I

missed most of the talk on that as well, as far as finished goods, work in

progress and raw materials. Do you have that number?

Kevin Rauckman:: Well we had talked about raw materials increasing during the quarter

about 16 million with finished goods going up about 15 work in process up

about 4. Those are the numbers we stated earlier.

(Todd Senek): Okay I missed that. All right, fair enough.


(Todd Senek): Thank you.



Operator: At this time there are no further questions. Are there any closing remarks?

Polly Schwerdt: No, that’s it. Thank you everyone for joining us this quarter.

Min Kao: Okay thank you.

Kevin Rauckman: Thanks, bye.

Operator: Thank you. This concludes your conference.

You may now disconnect.

END

GARMIN INTERNATIONAL, INCORPORATED Moderator: Min Kao ... · growth of 34% in the quarter. We also...

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