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Corporate earnings
Wednesday, 30 October 2013, 12:00 am CDT

Garmin Reports Solid Third Quarter 2013 Results and Raises Full Year Outlook

SCHAFFHAUSEN, Switzerland–(BUSINESS WIRE)–Garmin Ltd. (Nasdaq: GRMN) today announced results for the fiscal quarter ended September 28, 2013. Highlights in the quarter include:

  • Total revenue of $644 million in third quarter 2013 with non-automotive/mobile segments of outdoor, fitness, aviation and marine delivering 50% of total revenues and growing 12% over the year ago quarter
  • Operating margin of 24% with 65% of operating profit from non-automotive/mobile segments
  • Introduced the VIRB™ and VIRB Elite action cameras, offering unique features available only through the integration with Garmin products and sensors
  • Announced the Edge® Touring cycling computer and updates to our popular Forerunner® GPS running watches
  • Generated $205 million of free cash flow in third quarter 2013
(in thousands, 13-Weeks Ended 39-Weeks Ended
except per share data) Sept 28, Sept 29, Yr over Yr Sept 28, Sept 29, Yr over Yr
2013 2012 Change 2013 2012 Change
Net sales $643,637 $672,376 -4% $1,872,156 $1,947,127 -4%
Automotive/Mobile 322,520 384,393 -16% 919,810 1,055,786 -13%
Outdoor 101,350 105,572 -4% 284,372 283,230 0%
Aviation 83,459 72,857 15% 251,970 221,676 14%
Fitness 81,007 64,788 25% 237,660 217,815 9%
Marine 55,301 44,766 24% 178,344 168,620 6%
Gross profit % 55% 53% 54% 55%
Operating profit % 24% 24% 21% 23%

Pro forma diluted EPS (1)

 $0.69 $0.74 -7% $1.86 $2.18 -15%
Note: YTD 2012 results include one-time royalty fee benefit of $21 million recorded in second quarter 2012 impacting gross margin.
(1) See table on final page for reconciliation of GAAP EPS to pro forma diluted EPS

Executive Overview from Cliff Pemble, President and Chief Executive Officer:

“Stronger than expected revenue performance continued in the third quarter with fitness and marine delivering exceptional growth,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “In addition, the gross and operating margins were strong as we effectively controlled operating expenses. This resulted in $0.69 of pro forma EPS. Given these third quarter results, we are increasing our full year pro forma EPS guidance to $2.40 – $2.45.”

Outdoor:

The outdoor segment posted a revenue decline of 4% in the quarter as we were unable to replicate our strong third quarter 2012 results. Gross and operating margins within the segment remained strong at 69% and 44%, respectively. During the quarter, we introduced our latest outdoor product family, the VIRB action cameras. The VIRB and VIRB Elite bring new features to the action camera market including color displays, GPS, extended battery life, fitness sensor integration, and ability to control the camera through a range of existing Garmin devices. We anticipate that this new offering and others coming in fourth quarter will accelerate growth in our outdoor segment.

Fitness:

The fitness segment posted revenue growth of 25% in the quarter as our full portfolio of products sold well, led by the Vector power meter and Edge cycling computers. While gross margins declined 370 basis points from the prior year due to the product mix, operating margins were consistent due to the strong revenue growth. In the third quarter, we announced the Forerunner 220 and 620, which will begin delivery in the fourth quarter. Consumer interest in these new running watches is strong due to the exciting new form factor, color display, and ground-breaking new features such as running dynamics and wireless connectivity. We also began shipment of the Edge Touring, designed for navigating by bike, and our first product specifically targeting this unique subset of the cycling community.

Aviation:

The aviation segment posted revenue growth of 15% in the quarter as both OEM and aftermarket contributed to revenue improvement. OEM growth continues to be driven by market share gains in the business jet and helicopter markets, as well as increased content with existing OEM partners. The gross and operating margins in aviation improved year-over-year to 71% and 28%, respectively. While near-term results have been positive, the industry remains challenging and this has been further intensified by the furloughs imposed at the FAA causing short-term delays in certifications and shipments. Though this may create headwinds in the fourth quarter, we continue to be excited about our long-term market share opportunities and will increase our research and development investment accordingly.

Marine:

The marine segment posted revenue growth of 24% in the quarter driven primarily by strong demand for our chartplotters. Unfortunately, the pricing environment for marine electronics has become more competitive, which is putting pressure on gross margins. This is a challenging industry dynamic but we managed operating expenses effectively in the quarter allowing us to generate operating income. We will continue to focus on innovation that will drive market share gains, while closely managing costs to improve long-term profitability.

Auto/Mobile:

The automotive/mobile segment posted a revenue decline of 16% as PND sales continued to decline as forecast. We anticipate PND volumes will continue to decline 20% globally in 2014 and are managing our business accordingly. Gross and operating margins in the quarter were 46% and 17%, respectively, as the segment remains highly profitable even while we continue to invest in research and development efforts related to long-term OEM opportunities. We look forward to seeing evidence of our success with the launch of Garmin navigation in some 2014 Mercedes Benz models.

Additional Financial Information:

Total operating expenses in the quarter were $201 million, a 1% increase from the prior year. Decreased spending in advertising was driven primarily by lower cooperative advertising, which is directly related to sales. This was offset by growing research and development investment in each of our segments while selling, general and administrative expenses were constant. We continue to invest in research and development to foster both near-term and long-term revenue growth opportunities.

The effective tax rate in third quarter 2013 was 15.7%, excluding the $52 million impact of reserve releases associated with specific uncertain tax positions offset by the Taiwan surtax due to this release of reserves, compared to 13.7% in the prior year due to changes in income mix by tax jurisdiction, as well as reduced tax incentives in Taiwan.

In the third quarter, we generated $205 million of free cash flow which continues to fund our quarterly dividend and share repurchase activity, which totaled $14 million in the current quarter. We ended the quarter with cash and marketable securities of almost $2.8 billion.

2013 Guidance Update:

2013 Update Prior
Revenue $2.5 – $2.6 B $2.5 – $2.6 B
Gross Margin 53 – 54% 53 – 54%
Operating Income ~ $530 M ~ $500 M
Operating Margin ~ 21% ~ 20%
Tax Rate 16% 15%
EPS (Pro Forma) $2.40 – $2.45 $2.30 – $2.40

We have increased our 2013 guidance to reflect the strong third quarter performance. We now anticipate operating income of approximately $530 million partially offset by a higher effective tax rate resulting in a pro forma EPS range of $2.40 – $2.45.

Webcast Information/Forward-Looking Statements:

The information for Garmin Ltd.’s earnings call is as follows:

When: Wednesday, October 30, 2013 at 10:30 a.m. Eastern
Where:

http://www.garmin.com/aboutGarmin/invRelations/irCalendar.html

How: Simply log on to the web at the address above or call to listen in at 888-389-5997

An archive of the live webcast will be available until December 27, 2013 on the Garmin website at www.garmin.com. To access the replay, click on the Investor Relations link and click over to the Events Calendar page.

This release includes projections and other forward-looking statements regarding Garmin Ltd. and its business. Any statements regarding the Company’s estimated earnings and revenue for fiscal 2013, the Company’s expected segment revenue growth rate, margins, new products to be introduced in 2013 and the Company’s plans and objectives are forward-looking statements. The forward-looking events and circumstances discussed in this release may not occur and actual results could differ materially as a result of risk factors affecting Garmin, including, but not limited to, the risk factors that are described in the Annual Report on Form 10-K for the year ended December 29, 2012 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2012 Form 10-K can be downloaded from http://www.garmin.com/aboutGarmin/invRelations/finReports.html.

Garmin, Edge, Approach and Forerunner are registered trademarks and VIRB and G5000 are trademarks of Garmin Ltd. or its subsidiaries. All other brands, product names, company names, trademarks and service marks are the properties of their respective owners. All rights reserved.

Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands, except per share information)
13-Weeks Ended 39-Weeks Ended
Sept 28, Sept 29, Sept 28, Sept 29,
2013 2012 2013 2012
Net sales $643,637 $672,376 $1,872,156 $1,947,127
Cost of goods sold 290,748 313,321 859,494 882,501
Gross profit 352,889 359,055 1,012,662 1,064,626
Advertising expense 26,251 30,102 77,983 91,952
Selling, general and administrative expense 86,462 86,402 260,769 275,763
Research and development expense 88,427 82,489 272,349 242,510
Total operating expense 201,140 198,993 611,101 610,225
Operating income 151,749 160,062 401,561 454,401
Other income (expense):
Interest income 8,435 7,987 25,512 26,278
Foreign currency gains (losses) (822 ) (6,364 ) 18,280 (16,124 )
Other 1,438 942 3,666 5,064
Total other income (expense) 9,051 2,565 47,458 15,218
Income before income taxes 160,800 162,627 449,019 469,619
Income tax (benefit) provision (26,869 ) 22,279 192 56,510
Net income $187,669 $140,348 $448,827 $413,109
Net income per share:
Basic $0.96 $0.72 $2.30 $2.12
Diluted $0.96 $0.72 $2.29 $2.11

Weighted average common shares outstanding:

Basic 195,325 194,912 195,488 194,834
Diluted 196,300 196,161 196,312 196,171
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
(Unaudited)
Sept 28, December 29,
2013 2012
Assets
Current assets:
Cash and cash equivalents $1,068,700 $1,231,180
Marketable securities 134,253 153,083
Accounts receivable, net 475,707 603,673
Inventories, net 416,725 389,931
Deferred income taxes 67,437 68,785
Deferred costs 56,749 53,948
Prepaid expenses and other current assets 225,067 35,520
Total current assets 2,444,638 2,536,120
Property and equipment, net 413,675 409,751
Marketable securities 1,594,144 1,488,312
Restricted cash 252 836
Noncurrent deferred income tax 94,734 93,920
Noncurrent deferred costs 39,625 42,359
Other intangible assets, net 221,979 232,597
Other assets 14,179 15,229
Total assets $4,823,226 $4,819,124
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $151,798 $131,263
Salaries and benefits payable 63,064 55,969
Accrued warranty costs 34,639 37,301
Accrued sales program costs 36,487 57,080
Deferred revenue 255,830 252,375
Accrued royalty costs 34,285 71,745
Accrued advertising expense 16,862 25,192
Other accrued expenses 73,241 69,806
Deferred income taxes 63 332
Income taxes payable 44,060 32,031
Dividend payable 263,704 175,932
Total current liabilities 974,033 909,026
Deferred income taxes 3,516 2,467
Non-current income taxes 121,091 181,754
Non-current deferred revenue 166,165 193,047
Other liabilities 917 1,034
Stockholders’ equity:

Shares, CHF 10 par value, 208,077,418 shares authorized and issued; 195,221,791 shares outstanding at September 28, 2013 and 195,591,854 shares outstanding at December 29, 2012

1,797,435 1,797,435
Additional paid-in capital 87,377 72,462
Treasury stock (100,912 ) (81,280 )
Retained earnings 1,701,823 1,604,625
Accumulated other comprehensive income 71,781 138,554
Total stockholders’ equity 3,557,504 3,531,796
Total liabilities and stockholders’ equity $4,823,226 $4,819,124
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
39-Weeks Ended
Sept 28, Sept 29,
2013 2012
Operating Activities:
Net income $448,827 $413,109

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 36,840 40,025
Amortization 23,629 21,192
(Gain)/Loss on sale of property and equipment 41 (17 )
Provision for doubtful accounts 1,023 2,786
Deferred income taxes 2,851 (7,384 )
Unrealized foreign currency losses/(gains) (17,273 ) 24,974
Provision for obsolete and slow moving inventories 15,965 3,795
Stock compensation expense 15,608 26,364
Realized gains on marketable securities (2,963 ) (1,647 )
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 128,098 103,039
Inventories (44,337 ) (44,761 )
Other current and non-current assets (18,329 ) 14,051
Accounts payable 21,936 (20,271 )
Other current and non-current liabilities (60,719 ) (63,839 )
Deferred revenue (22,613 ) 35,277
Deferred cost (57 ) (8,561 )
Income taxes payable (48,256 ) (28,098 )
Net cash provided by operating activities 480,271 510,034
Investing activities:
Purchases of property and equipment (41,325 ) (26,881 )
Proceeds from sale of property and equipment 65 25
Purchase of intangible assets (1,574 ) (5,174 )
Purchase of marketable securities (716,226 ) (1,004,021 )
Redemption of marketable securities 578,464 735,521
Advances under loan receivable commitment (173,708 ) –
Change in restricted cash 584 (59 )
Acquisitions, net of cash acquired (5,686 ) (4,010 )
Net cash used in investing activities (359,406 ) (304,599 )
Financing activities:
Dividends paid (263,857 ) (253,386 )
Purchase of treasury stock under share repurchase plan (26,926 ) –
Purchase of treasury stock related to equity awards (7,430 ) (6,542 )
Proceeds from issuance of treasury stock related to equity awards 13,620 10,971
Tax benefit from issuance of equity awards 411 1,810
Net cash used in financing activities (284,182 ) (247,147 )
Effect of exchange rate changes on cash and cash equivalents 837 1,625
Net increase/(decrease) in cash and cash equivalents (162,480 ) (40,087 )
Cash and cash equivalents at beginning of period 1,231,180 1,287,160
Cash and cash equivalents at end of period $1,068,700 $1,247,073
Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment (Unaudited)
Reporting Segments
Auto/

Outdoor

Fitness

Marine

Mobile

Aviation

Total

13-Weeks Ended Sept 28, 2013
Net sales $101,350 $81,007 $55,301 $322,520 $83,459 $643,637
Gross profit $69,471 $49,328 $27,265 $147,866 $58,959 $352,889
Operating income $44,107 $26,493 $4,118 $53,848 $23,183 $151,749
13-Weeks Ended Sept 29, 2012
Net sales $105,572 $64,788 $44,766 $384,393 $72,857 $672,376
Gross profit $72,420 $41,885 $28,572 $166,007 $50,171 $359,055
Operating income $48,384 $21,219 $8,378 $65,165 $16,916 $160,062
39-Weeks Ended Sept 28, 2013
Net sales $284,372 $237,660 $178,344 $919,810 $251,970 $1,872,156
Gross profit $184,333 $149,368 $91,550 $410,348 177,063 $1,012,662
Operating income $110,538 $76,026 $16,089 $134,324 $64,584 $401,561
39-Weeks Ended Sept 29, 2012
Net sales $283,230 $217,815 $168,620 $1,055,786 $221,676 $1,947,127
Gross profit $186,574 $142,045 $105,205 $476,761 $154,041 $1,064,626
Operating income $118,032 $76,016 $35,584 $170,208 $54,561 $454,401
Garmin Ltd. And Subsidiaries
Revenue by Geography (Unaudited)
13-Weeks Ended 39-Weeks Ended
Sept 28, Sept 29, Yr over Yr Sept 28, Sept 29, Yr over Yr
2013 2012 Change 2013 2012 Change
Net sales $643,637 $672,376

-4%

$1,872,156 $1,947,127 -4%
Americas 333,448 380,452 -12% 1,002,796 1,068,289 -6%
EMEA 245,659 224,642 9% 692,836 692,673 0%
APAC 64,530 67,282 -4% 176,524 186,165 -5%
EMEA – Europe, Middle East and Africa; APAC – Asia Pacific

Non-GAAP Financial Information

Management believes that net income per share before the impact of foreign currency translation gain or loss and income tax adjustments that materially impact the effective tax rate due to completion of tax audits and/or expiration of statutes is an important measure. The majority of the Company’s consolidated foreign currency gain or a loss result from transactions involving the Euro, the British Pound Sterling and the Taiwan Dollar and from the exchange rate impact of the significant cash and marketable securities, receivables and payables held in U.S. dollars at the end of each reporting period by the Company’s various non U.S. subsidiaries. Such gain or loss 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 gain or loss. The Company’s income tax expense is periodically impacted by material reserve releases related to completion of audits and/or the expiration of statutes effecting prior periods. This is not reflective of the current effective tax rate. The release of other uncertain tax position reserves, amounting to approximately $10 million in the 2013 periods and $12 million in the 2012 periods, have not been included as pro forma adjustments in the following presentation of pro forma net income as such amounts have been considered immaterial, tend to be more recurring in nature and are comparable between periods. Accordingly, earnings per share before the impact of foreign currency translation gain or loss and income tax adjustments that materially impact the effective tax rate due to completion of tax audits and/or expiration of statutes permits a consistent comparison of the Company’s operating performance between periods.

Garmin Ltd. And Subsidiaries
Net income per share (Pro Forma)
(in thousands, except per share information)
13-Weeks Ended 39-weeks Ended
Sept 28, Sept 29, Sept 28, Sept 29,
2013 2012 2013 2012
Net Income (GAAP) $187,669 $140,348 $448,827 $413,109
Foreign currency (gain) / loss, net of tax effects $692 $5,493 ($15,475 ) $14,184

Income tax benefit due to completion of tax audits and/or expiration of statutes

($52,180 ) – ($68,716 ) –
Net income (Pro Forma)

$136,181

$145,841 $364,636 $427,293
Net income per share (GAAP):
Basic $0.96 $0.72 $2.30 $2.12
Diluted $0.96 $0.72 $2.29 $2.11
Net income per share (Pro Forma):
Basic $0.70 $0.75 $1.87 $2.19
Diluted $0.69 $0.74 $1.86 $2.18
Weighted average common shares outstanding:
Basic 195,325 194,912 195,488 194,834
Diluted 196,300 196,161 196,312 196,171

Management believes that free cash flow is an important financial measure because it represents the amount of cash provided by operations that is available for investing and defines it as operating cash flow less capital expenditures for property and equipment.

Garmin Ltd. And Subsidiaries
Free Cash Flow
(in thousands)
13-Weeks Ended 39-weeks Ended
Sept 28, Sept 29, Sept 28, Sept 29,
2013 2012 2013 2012
Net cash provided by operating activities $216,609 $164,901 $480,271 $510,034
Less: purchases of property and equipment ($11,602 ) ($9,455 ) ($41,325 ) ($26,881 )
Free Cash Flow $205,007 $155,446 $438,946 $483,153

 

Contacts

Garmin Ltd.Investor Relations:Kerri Thurston, [email protected] Relations:Ted Gartner, [email protected]