Garmin closes first day up more than 40%

Garmin closes first day up more than 40 percent

By Rod Perlmutter,

OLATHE, Kan., Dec. 8, 2000 ( — Garmin Ltd.’s first day on the Nasdaq was a good one. Garmin shares closed Friday up 42.9 percent, or $6, at $20. The day’s range was $22.88 and $15.13, with some 8.6 million shares changing hands. The stock outperformed the NASDAQ itself, which rose 5.99 percent, or 164.77 points for the day, to close at 2,917.43.

The maker of Global Positioning System devices had priced its initial public offering at $14 per share.

However, the IPO had a rough ride due to market conditions before the shares began trading. Garmin initially priced its IPO at $18 to $20 per share on Oct. 8. In a filing with the Securities and Exchange Commission dated Nov. 15, the firm lowered the price to $15 to $17 per share.

The company offered some 7.87 million shares, while existing Garmin shareholders offered a further 2.6 million shares. When Garmin (NASDAQ: GRMN) filed for the IPO on Sept. 11, the company said it hoped to raise a maximum of $230 million from the offer.

Proceeds to launch new products

The company said in its SEC filings it plans to use the IPO proceeds for working capital and other corporate purposes, including possible acquisitions or strategic partnerships and expansion into other markets.

Gary Burrell, co-founder and co-chief executive officer, said Garmin intends to use some of the money raised to expand its operations in automotive technology. There are more than 5.5 million GPS car navigation systems in use now throughout the world, including about 1 million in the United States.

Garmin also intends to use the money to expand into wireless GPS services, Burrell said, as well as move into its new 240,000 square-foot facility in Olathe, which is more than twice the size of its current manufacturing and engineering plant. Garmin expects to occupy the building in February, and to hire more engineers and manufacturing staff, Burrell said.

Despite the market turmoil, Randy Hoffman, founder and former president of Magellan Inc., a competitor in the aviation and recreational GPS device markets, said if any company does well in today’s frantic stock market, it should be Garmin.

“Garmin is a great company, continues to generate excellent returns, and the stock price, barring external forces, should reflect that,” said Hoffman, currently the owner and founder of of Thousand Oaks, Calif. “With this year’s market, most companies pulled their IPOs. For Garmin to go forward shows how confident they are in ability to continue to make profits. It takes a brave and confident company to go public right now.”

Change in regulation boosts value

One reason for Hoffman’s optimism and Garmin’s confidence: a change in federal regulations in May that literally makes Global Positioning System technology 10 times more accurate than they were before.

Garmin is one of more than 160 manufacturers who make products that use the Global Positioning System, a network maintained by the U.S. Defense Department to allow the military and civilians to determine their geographic location anywhere in the world.

The GPS system uses 24 satellites that each circle the earth in precisely determined orbits every 12 hours. The first satellites were launched in 1978. When the service was made available for commercial use in 1983, it spawned a boom that analysts predict will become a $13.9 billion market by 2005.

Mike Swiek, executive director of the U.S. GPS Industry Council of Washington, D.C, said the GPS market exists because the U.S. government spends about $500 million annually to maintain the satellite network.

But for years, the civilian version of GPS was not as precise as the military version. The Defense Department used “selective availability” – a process that deliberately degraded the civilian signal, making it accurate only within 100 meters.

That aggravated many GPS device users, like Will Kostelecky of Annapolis, Md. The Garmin unit he bought for his sailboat showed him colliding with a mark when he was actually more than 100 yards away. He was so annoyed he created a Website urging GPS users to lobby government to quit “dithering” the signal.

GPS manufacturers had more pressing concerns, Swiek and Hoffman said. During the Persian Gulf War, the government had so few GPS devices that it turned to Magellan and Trimble for its commercial devices.  That military success proved the power of GPS technology, but also provoked worries that GPS could be used against American interests.

Manufacturers formed the U.S. GPS Industry Council to prevent export restrictions on GPS devices, said Hoffman, who served as the council’s first chairperson. “Most of the people who were looking for export control didn’t know the GPS units were being made around the world,” Hoffman said.

In 1996, the White House Office of Science and Technology Policy stated that it was the government’s “intention to discontinue the use of GPS Selective Availability within a decade in a manner that allows adequate time and resources for our military forces to prepare fully for operations without (it).”

Kostelecky fumed. Why ten years? He said the military turned off Selective Availability  during Desert Storm to make GPS more precise, and the armed forces didn’t suffer. Furthermore, Kostelecky said, if adversaries wanted to manipulate GPS for their own anti-American schemes, they could use a Soviet-built system called Glosnass.

In that 1996 announcement, the White House said it would begin making annual determination on whether to discontinue Selective Availability in 2000. On May 1, President Clinton announced that Selective Availability was being stopped.

“The decision…is supported by threat assessments which conclude that setting Selective Availability  to zero at this time would have minimal impact on national security,” Clinton stated. “Additionally, we have demonstrated the capability to selectively deny GPS signals on a regional basis when our national security is threatened.”

Even though the GPS industry represents more than 100,000 jobs in an $8 billion market, Swiek said the council was not aggressively pushing for the end of selective availability.

“Some devices will benefit from the removal, but it was never a do-or-die situation,” Swiek said. “It was a prudent decision by the Defense Department. We didn’t want market forces to go too rapidly and leave U.S. forces vulnerable.”

The decision means that GPS products can now pinpoint a location within 10 meters, as opposed to 100 or more. That will help both GPS products in general, and Garmin’s valuation, Hoffman and Swiek said.

“A fisherman might say,  ‘For getting within 100 meters of my favorite fishing spot, I won’t spend money for that, but if I can get within 10 meters, that’s pretty darn close,'” Hoffman said.

“Any time you get more for no cost, that’s a good thing,” Swiek added.

But since the regulation came down, the removal of SA has not had much of an impact on the major public companies that make GPS products, said Laurence Baker, managing director of  Legg Mason Wood Walker in Baltimore, MD. This year, ORB has dropped from about $15 to $5, and LEIX from about $6 to $2. “None of these stocks have done well this year. These companies must have other issues.”

Finances in good shape, but faces dozens of competitors

For the 1999 fiscal year ended Dec. 25, Garmin reported net sales of $232.6 million, compared with $169 million for the previous year. The company reported net earnings of $64.2 million, compared with $35.1 million for 1999.

On Nov. 2, Garmin reported that for the first nine months of this year net earnings almost doubled compared to the previous year. For the nine-month period ended Sept. 23, net earnings were $78.1 million, compared with $43.6 million last year.

Net sales for the nine-month period totaled $260.1 million, a 58 percent increase over the $164.5 million recorded during the same period last year.

Garmin makes Global Positioning System devices that communicate with satellites to help people, such as fishermen and pilots, find their way. GPS, first made available by the U.S. government for commercial use in 1983, is a navigation system which enables the precise determination of geographic location using satellite technology.

Garmin’s SEC filing identifies at least 24 competitors in various GPS  device niches, including the subsidiaries of some publicly traded companies.

For example, Garmin’s 15 hand-held GPS devices, which range in price from about $119 to $699, face competition from devices made by Magellan Corp. of Santa Clara, Calif., a subsidiary of Orbital Sciences (Nasdaq: ORB) of Dulles, Va., Lowrance Electronics Inc. (Nasdaq: LEIX) of Tulsa, Okla.;  the Cetrek division of Teleflex (Nasdaq: TFX) of Plymouth Meeting, Penn., and several privately held firms, including Raytheon Marine Co. and Furuno Electronic Co.

These devices are favorites of hunters, hikers, fisherman and others. Garmin cited a report by the market research firm Frost and Sullivan stating that in 1999, its hand-held unit volume represent about half of the North American recreational market

Garmin’s six portable aviation GPS units, which range in price from about $600 to $1,500, compete primarily with Lowrance and Magellan. According to an Aircraft Electronics Association report, Garmin’s unit volume was 76 percent of the U.S. portable aviation market. Garmin’s two integrated avionics systems, which sells for about $9,500 and $15,000, compete with Honeywell (HON), Avidyne Corp. and Northstar Technologies. According to the Aircraft Electronics Association, Garmin units represent about 59 percent of that U.S market.

Though it sells more recreational hand-held units, a bigger reason for Garmin’s success is the aviation market, Hoffman said. While the lower cost hand held units have a profit margin of less than 15 percent, the aviation units, because they have to comply with strict federal regulation, have a profit margin of 20 percent to 30 percent, Hoffman said.

Garmin was founded in 1989 by Min H. Kao and Burrell, who are co-chief executive officers.

Garmin employs more than 1,200 people at manufacturing plants in Olathe and Taiwan, and is incorporated in Grand Cayman, Cayman Islands.

© 2000 is a trademark of, Inc. All Rights Reserved. granted permission to repost this article.


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