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Corporate earnings
Wednesday, 27 July 2016, 12:00 am CDT

Garmin Reports Second Quarter Revenue and EPS Growth; Raises Guidance

Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the second
quarter ended June 25, 2016.

Highlights for the second quarter 2016 include:

  • Total revenue of $812 million, growing 5% over the prior year, with
    fitness, outdoor, marine and aviation collectively growing 20% over
    the year ago quarter and contributing 70% of total revenue
  • Gross margin expanded to 57.0% compared to 54.2% in the prior year
    quarter, and operating margin expanded to 24.7% compared to 21.5% in
    the prior year quarter
  • GAAP EPS was $0.85, a 18% improvement over the prior year, and pro
    forma EPS(1) was $0.87, a 21% improvement over the prior
    year
  • Our wearable offerings continued to expand in the quarter as we
    introduced and shipped the Forerunner® 735XT, vivosmart® HR+, and
    vivomoveTM
  • Our Connect IQTM store offers over 2,000 apps, watch faces,
    and widgets for select Garmin wearables and has delivered over 13
    million downloads to customers since its inception in early 2015
(in thousands, 13-Weeks Ended 26-Weeks Ended
except per share data) June 25, June 27, Yr over Yr June 25, June 27, Yr over Yr
2016

2015
(2)

Change 2016

2015
(2)

Change
Net sales $ 811,609 $ 773,830 5 % $ 1,435,648 $ 1,359,224 6 %
Fitness 212,855 158,649 34 % 355,273 289,644 23 %
Outdoor 133,096 108,621 23 % 229,923 181,436 27 %
Marine 111,599 103,713 8 % 194,479 168,010 16 %
Aviation 108,331 102,266 6 % 214,647 200,327 7 %
Auto 245,728 300,581 -18 % 441,326 519,807 -15 %
Gross profit % 57.0 % 54.2 % 55.9 % 56.2 %
Operating profit % 24.7 % 21.5 % 21.2 % 20.5 %
GAAP diluted EPS $ 0.85 $ 0.72 18 % $ 1.31 $ 1.07 22 %
Pro forma diluted EPS (1) $ 0.87 $ 0.72 21 % $ 1.36 $ 1.26 8 %

(1) See attached table for reconciliation of non-GAAP measures
including pro forma diluted EPS.

(2) Action camera related net sales for the 13-weeks and 26-weeks
ended June 27, 2015 have been recast from the Outdoor segment to
the Auto segment to conform to the current year presentation.


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

“We achieved strong results in the second quarter of 2016 with each
business segment delivering solid performance,” said Cliff Pemble,
president and chief executive officer (CEO) of Garmin Ltd. “Fitness and
outdoor achieved impressive revenue and profit growth driven by our
strengthening position in the wearables market. Aviation and marine also
delivered revenue and profit growth while auto remains a solid base of
profit contributions to the overall business. I am pleased with our
performance in the first half of 2016 which gives us confidence to raise
our guidance for the full year.”


Fitness:

The fitness segment posted robust revenue growth of 34% in the quarter
driven by wearable devices. Gross margin was consistent year-over-year
at 56% while operating margin improved to 25% from 21% in the prior
year. During the quarter, we began shipping the previously announced
vivoactive® HR and vivofit® 3 activity trackers as well as the
Forerunner® 735XT, a lightweight multi-sport-capable running watch, the
vivosmart® HR +, our smart activity tracker with GPS, and vivomoveTM,
a fashionable analog watch with activity tracking features and a one
year battery life.


Outdoor:

The outdoor segment posted robust revenue growth of 23% driven by
wearable devices and a full quarter contribution of our recently
acquired DeLorme products. Gross and operating margin was 64% and 36%
respectively, an improvement over a year ago resulting in a 31% increase
in operating income. Our recently introduced Approach® X40 began
shipping late in the quarter and is generating positive customer
response by bringing golf specific features to an activity tracker band.
Also, we recently broadened our handheld product line with the
introduction of the Oregon® 700 series of handheld GPS units featuring a
redesigned GPS antenna, smart notifications and automatic uploads.


Marine:

The marine segment posted solid second quarter revenue growth of 8%
driven by our strong lineup of chart plotters, fish finders, and
entertainment systems. Growth was driven by market share gains in the
inland fishing category. Gross margins increased year-over-year to 58%
while operating margin increased to 26% resulting in operating income
growth of 19%.


Aviation:

The aviation segment posted revenue growth of 6% in the quarter despite
ongoing softness in the overall aviation market. Our solid performance
was driven by growth in OEM sales as well as Automatic Dependent
Surveillance Broadcast (ADS-B) systems. Both the gross margin and
operating margin were strong at 74% and 28%, respectively, and improved
compared to the year ago quarter resulting in a 13% increase in
operating income.


Auto:

The auto segment recorded revenue decline of 18% primarily due to the
ongoing PND market contraction and headwinds caused by additional
revenue deferrals associated with certain auto OEM products. Gross and
operating margins improved to 46% and 16%, respectively. We continue to
make inroads with automakers and have recently been recognized at the
2016 Beijing Auto Show as the factory-installed Original Equipment
Digital Video Recorder (OE DVR) solution in the new Peugeot 3008.


Additional Financial Information:

Total operating expenses in the quarter were $262 million, a 4% increase
from the prior year. Research and development investment increased 5%,
with growth primarily focused on aviation and our active lifestyle
products in fitness and outdoor. Advertising decreased 3%, driven
primarily by year-over-year decreases in auto and marine, partially
offset by increases in fitness and outdoor advertising to support
wearables. Selling, general and administrative expense increased by 6%,
and is relatively flat as a percent of sales.

The effective tax rate in the second quarter of 2016 was 21.0%, which is
comparable to the effective tax rate of 20.6% in the prior year quarter.

In the second quarter 2016, we generated $135 million of free cash flow
(see attached table for reconciliation of this non-GAAP measure). We
continued to return cash to shareholders with our quarterly dividend of
approximately $97 million and our share repurchase activity, which
totaled more than $25 million in the second quarter. We have
approximately $123 million remaining in the share repurchase program
authorized through December 31, 2016, and expect to repurchase as
business and market conditions warrant. We ended the quarter with cash
and marketable securities of about $2.4 billion.


2016 Guidance:

Based on our performance in the first half of 2016, we are updating our
full year guidance. We now anticipate revenue of approximately $2.9
billion driven primarily by a stronger outlook for our outdoor and
fitness segments. We anticipate our full year EPS will be approximately
$2.50 based on gross margin of about 55%, operating margin of about 19%
and a full year effective tax rate of about 19.5%.

2016 Update Prior
Revenue ~$2.9 B ~$2.82 B
Gross Margin ~55% ~54.5%
Operating Income ~550M ~510M
Operating Margin ~19% ~18%
Tax Rate ~19.5% ~20.5%
Pro Forma EPS (3) ~$2.50 ~$2.25
(3) See below details on forward-looking pro forma EPS


Webcast Information/Forward-Looking Statements:

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

When: Wednesday, July 27, 2016 at 10:30 a.m. Eastern
Where:

http://www.garmin.com/en-US/company/investors/events/

How: Simply log on to the web at the address above or call to listen in
at 855-757-3897

An archive of the live webcast will be available until October 28, 2016
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 that are commonly
identified by words such as “would,” “may,” “expects,” “estimates,”
“plans,” “intends,” “projects,” and other words or phrases with similar
meanings. Any statements regarding the Company’s GAAP and pro
forma estimated earnings, EPS and revenue for fiscal 2016, the Company’s
expected segment revenue growth rates, margins, currency movements,
expenses, pricing, new products to be introduced in 2016 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 and uncertainties 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 26, 2015 filed by Garmin with the
Securities and Exchange Commission (Commission file number 0-31983). A
copy of Garmin’s 2015 Form 10-K can be downloaded from

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

.

Garmin, the Garmin logo, the Garmin delta, Approach, Forerunner, Oregon,
vívoactive, vívofit and vivosmart® are trademarks of Garmin Ltd. or its
subsidiaries and are registered in one or more countries, including the
U.S.; vivomove and Connect IQ, are trademarks of, or exclusively
licensed to, 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 26-Weeks Ended
June 25, June 27, June 25, June 27,
2016 2015 2016 2015
Net sales $ 811,609 $ 773,830 $ 1,435,648 $ 1,359,224
Cost of goods sold 348,651 354,580 632,840 595,852
Gross profit 462,958 419,250 802,808 763,372
Advertising expense 44,252 45,794 76,485 73,466
Selling, general and administrative expense 103,677 97,552 199,287 196,302
Research and development expense 114,355 109,240 222,559 215,242
Total operating expense 262,284 252,586 498,331 485,010
Operating income 200,674 166,664 304,477 278,362
Other income (expense):
Interest income 8,455 7,420 15,883 15,444
Foreign currency (losses) (5,743 ) (487 ) (10,582 ) (44,751 )
Other income (loss) 415 (39 ) 1,570 698
Total other income (expense) 3,127 6,894 6,871 (28,609 )
Income before income taxes 203,801 173,558 311,348 249,753
Income tax provision 42,737 35,805 62,193 45,208
Net income $ 161,064 $ 137,753 $ 249,155 $ 204,545
Net income per share:
Basic $ 0.85 $ 0.72 $ 1.32 $ 1.07
Diluted $ 0.85 $ 0.72 $ 1.31 $ 1.07
Weighted average common
shares outstanding:
Basic 188,892 191,101 189,195 191,432
Diluted 189,356 191,600 189,491 191,939
Garmin Ltd. And Subsidiaries

Condensed Consolidated
Balance Sheets

(In thousands, except per share
information)
(Unaudited)
June 25, December 26,
2016 2015
Assets
Current assets:
Cash and cash equivalents $ 801,464 $ 833,070
Marketable securities 252,253 215,161
Accounts receivable, net 510,309 531,481
Inventories, net 508,161 500,554
Deferred costs 46,552 49,176
Prepaid expenses and other current assets 93,848 81,645
Total current assets 2,212,587 2,211,087
Property and equipment, net 450,654 446,089
Marketable securities 1,306,159 1,343,387
Restricted cash 257 259
Noncurrent deferred income tax 118,320 116,518
Noncurrent deferred costs 47,535 38,769
Intangible assets, net 303,348 245,552
Other assets 88,723 97,730
Total assets $ 4,527,583 $ 4,499,391
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 151,904 $ 178,905
Salaries and benefits payable 68,067 70,601
Accrued warranty costs 34,670 30,449
Accrued sales program costs 49,538 67,613
Deferred revenue 150,587 164,982
Accrued royalty costs 44,213 30,310
Accrued advertising expense 24,534 33,547
Other accrued expenses 77,442 74,926
Income taxes payable 24,714 21,674
Dividend payable 384,760 192,991
Total current liabilities 1,010,429 865,998
Deferred income taxes 54,633 56,210
Non-current income taxes 111,664 101,689
Non-current deferred revenue 130,342 128,731
Other liabilities 1,680 1,637
Stockholders’ equity:
Shares, CHF 10 par value, 208,077 shares authorized and issued;
188,877 shares outstanding at June 25, 2016
and 189,722 shares outstanding at December 26, 2015 1,797,435 1,797,435
Additional paid-in capital 73,279 62,239
Treasury stock (445,268 ) (414,637 )
Retained earnings 1,794,792 1,930,517
Accumulated other comprehensive income (1,403 ) (30,428 )
Total stockholders’ equity 3,218,835 3,345,126
Total liabilities and stockholders’ equity $ 4,527,583 $ 4,499,391
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
26-Weeks Ended
June 25, June 27,
2016 2015
Operating Activities:
Net income $ 249,155 $ 204,545
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 26,657 24,915
Amortization 14,852 13,215
Loss on sale or disposal of property and equipment 64 420
Provision for doubtful accounts 1,548 (1,499 )
Deferred income taxes (6,074 ) (9,325 )
Unrealized foreign currency loss 3,198 59,046
Provision for obsolete and slow moving inventories 15,892 6,569
Stock compensation expense 19,507 14,742
Realized gain on marketable securities (188 ) (364 )
Changes in operating assets and liabilities:
Accounts receivable 24,415 60,016
Inventories (16,672 ) (45,635 )
Other current and non-current assets (865 ) (74,725 )
Accounts payable (32,291 ) (7,084 )
Other current and non-current liabilities (10,806 ) (53,808 )
Deferred revenue (13,066 ) (38,836 )
Deferred cost (6,089 ) 6,892
Income taxes payable 10,135 (174,788 )
Net cash provided by (used in) operating activities 279,372 (15,704 )
Investing activities:
Purchases of property and equipment (28,614 ) (39,732 )
Proceeds from sale of property and equipment – 665
Purchase of intangible assets (2,831 ) (1,939 )
Purchase of marketable securities (457,433 ) (480,090 )
Redemption of marketable securities 466,526 540,785
Change in restricted cash 2 29
Acquisitions, net of cash acquired (62,137 ) (12,632 )
Net cash (used in) provided by investing activities (84,487 ) 7,086
Financing activities:
Dividends paid (193,111 ) (183,925 )
Purchase of treasury stock under share repurchase plan (45,097 ) (57,295 )
Purchase of treasury stock related to equity awards (173 ) (240 )
Proceeds from issuance of treasury stock related to equity awards 8,970 8,560
Tax benefit from issuance of equity awards 2 1,239
Net cash used in financing activities (229,409 ) (231,661 )
Effect of exchange rate changes on cash and cash equivalents 2,918 (17,806 )
Net decrease in cash and cash equivalents (31,606 ) (258,085 )
Cash and cash equivalents at beginning of period 833,070 1,196,268
Cash and cash equivalents at end of period $ 801,464 $ 938,183
Garmin Ltd. And Subsidiaries
Net Sales, Gross Profit, and Operating Income by Segment
(Unaudited)
(In thousands)
Reporting Segments


Outdoor


Fitness


Marine


Auto


Aviation


Total

13-Weeks Ended June 25, 2016
Net sales $133,096 $212,855 $111,599 $245,728 $108,331 $811,609
Gross profit $85,224 $119,805 $64,515 $112,988 $80,426 $462,958
Operating income $48,565 $53,074 $28,548 $39,623 $30,864 $200,674

13-Weeks Ended June 27, 2015
(4)
Net sales $108,621 $158,649 $103,713 $300,581 $102,266 $773,830
Gross profit $66,019 $88,458 $58,577 $131,933 $74,263 $419,250
Operating income $37,201 $33,070 $23,901 $45,087 $27,405 $166,664
26-Weeks Ended June 25, 2016
Net sales $229,923 $355,273 $194,479 $441,326 $214,647 $1,435,648
Gross profit $144,155 $192,100 $108,664 $199,131 $158,758 $802,808
Operating income $76,450 $69,647 $38,840 $58,190 $61,350 $304,477

26-Weeks Ended June 27, 2015
(4)
Net sales $181,436 $289,644 $168,010 $519,807 $200,327 $1,359,224
Gross profit $115,084 $171,534 $94,090 $236,891 $145,773 $763,372
Operating income $60,730 $67,709 $28,468 $67,870 $53,585 $278,362

(4) Action camera related operating results for the 13-weeks and
26-weeks ended June 27, 2015 have been recast from
the
Outdoor segment to the Auto segment to conform to the current year
presentation.

Garmin Ltd. And Subsidiaries
Net Sales by Geography (Unaudited)
(In thousands)
13-Weeks Ended 26-Weeks Ended
June 25, June 27, Yr over Yr June 25, June 27, Yr over Yr
2016 2015 Change 2016 2015 Change
Net sales $ 811,609 $ 773,830 5 % $ 1,435,648 $ 1,359,224 6 %
Americas 407,017 417,056 -2 % 724,974 722,317 0 %
EMEA 309,721 274,454 13 % 535,448 482,805 11 %
APAC 94,871 82,320 15 % 175,226 154,102 14 %
EMEA – Europe, Middle East and Africa; APAC – Asia Pacific

Non-GAAP Financial Information

To supplement our financial results presented in accordance with GAAP,
this release includes the following measures defined by the Securities
and Exchange Commission as non-GAAP financial measures: pro forma net
income (earnings) per share, forward-looking pro forma earnings per
share and free cash flow. These non-GAAP measures are not based on any
comprehensive set of accounting rules or principles and should not be
considered a substitute for, or superior to, financial measures
calculated in accordance with GAAP, and may be different from non-GAAP
measures used by other companies. Management believes providing
investors with an operating view consistent with how it manages the
Company provides enhanced transparency into the operating results of the
Company.


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 income tax adjustments
that materially impact the effective tax rate, as discussed below, is an
important measure. The majority of the Company’s consolidated foreign
currency gain or loss result from balances involving the Euro and the
Taiwan Dollar and from the exchange rate impact of the significant cash
and marketable securities, receivables and payables held in a currency
other than the functional currency at one of the Company’s subsidiaries.
However, there is minimal cash impact from such foreign currency gain or
loss. The Company’s income tax expense is periodically impacted by
material net releases of reserves primarily related to completion of
audits and/or the expiration of statutes affecting prior periods. Thus,
reported income tax expense is not reflective of the income tax expense
that is incurred related to the current period earnings. The net release
of other uncertain tax position reserves, amounting to approximately
$4.9 million and $6.9 million in first half 2016 and 2015, respectively,
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 permit a
consistent comparison of the Company’s operating performance between
periods. The tax effect was calculated using effective tax rates of
21.0% and 20.6% for the second quarters of 2016 and 2015, respectively
and 20.0% and 18.1% for the year-to-date 2016 and 2015. The effective
tax rate is calculated by taking the Income tax provision divided by
Income before taxes, as presented on the face of the Consolidated
Statements of Income both on a quarterly and year-to-date basis.

Garmin Ltd. And Subsidiaries
Net income per share (Pro Forma)
(in thousands, except per share information)
13-Weeks Ended 26-Weeks Ended
June 25, June 27, June 25, June 27,
2016 2015 2016 2015
Net Income (GAAP) $ 161,064 $ 137,753 $ 249,155 $ 204,545
Foreign currency loss $ 5,743 $ 487 $ 10,582 $ 44,751
Tax effect of foreign currency loss ($1,204 ) ($100 ) ($2,114 ) ($8,101 )
Net income (Pro Forma) $ 165,603 $ 138,140 $ 257,623 $ 241,195
Net income per share (GAAP):
Basic $ 0.85 $ 0.72 $ 1.32 $ 1.07
Diluted $ 0.85 $ 0.72 $ 1.31 $ 1.07
Net income per share (Pro Forma):
Basic $ 0.88 $ 0.72 $ 1.36 $ 1.26
Diluted $ 0.87 $ 0.72 $ 1.36 $ 1.26
Weighted average common shares outstanding:
Basic 188,892 191,101 189,195 191,432
Diluted (GAAP) 189,356 191,600 189,491 191,939


Forward-looking pro forma earnings per share

The Company has not provided a GAAP reconciliation for forward-looking
pro forma earnings per share because such measure cannot be provided
without unreasonable efforts on a forward-looking basis due to the high
variability and low visibility with respect to non-operating foreign
currency exchange gains and losses and the related tax effects of such
gains and losses. The impact of such foreign currency gains and losses,
net of tax effects, was $0.05 per share for the 26-weeks ended June 25,
2016, as indicated above. No other pro forma income tax adjustments have
been included in forward-looking pro forma earnings per share.


Free cash flow

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
plus one-time cash payments associated with our inter-company
restructuring less capital expenditures for property and equipment.

Garmin Ltd. And Subsidiaries
Free Cash Flow

(in thousands)
13-Weeks Ended 26-Weeks Ended
June 25, June 27, June 25, June 27,
2016 2015 2016 2015
(in thousands)
Net cash provided by (used in) operating activities $ 149,985 ($97,359 ) $ 279,372 ($15,704 )
Less: purchases of property and equipment (14,706 ) (21,589 ) (28,614 ) (39,732 )
Plus: taxes paid related to inter-company restructuring – 182,800 – 182,800
Free Cash Flow $ 135,279 $ 63,852 $ 250,758 $ 127,364

 

Contacts

Garmin Ltd. Investor Relations Contact: Teri Seck, 913-397-8200 [email protected] or Media Relations Contact: Ted Gartner, 913-397-8200 [email protected]