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Corporate earnings
Wednesday, 26 October 2016, 12:00 am CDT

Garmin Reports Third Quarter Revenue and EPS Growth; Raises Guidance

Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the third
quarter ended September 24, 2016.

Highlights for the third quarter 2016 include:

  • Total revenue of $722 million, growing 6% over the prior year, with
    fitness, outdoor, marine and aviation collectively growing 24% over
    the prior year quarter and contributing 70% of total revenue
  • Gross margin expanded to 56.2% compared to 53.3% in the prior year
    quarter, and operating margin expanded to 22.1% compared to 18.5% in
    the prior year quarter
  • GAAP EPS was $0.66, a 5% improvement over the prior year quarter, and
    pro forma EPS(1) was $0.75, a 47% improvement over the
    prior year quarter
  • Launched new product categories with the vívofit® jr., our first
    wearable and companion mobile application designed for kids, and the
    fēnix® Chronos, a luxury activity watch crafted with premium materials
(in thousands, 13-Weeks Ended 39-Weeks Ended
except per share data) Sept 24, Sept 26, Yr over Yr Sept 24, Sept 26, Yr over Yr
2016

2015
(2)

Change 2016

2015
(2)

Change
Net sales $ 722,250 $ 679,690 6 % $ 2,157,898 $ 2,038,913 6 %
Fitness 189,161 143,216 32 % 544,434 432,859 26 %
Outdoor 141,006 109,863 28 % 370,929 291,299 27 %
Marine 70,010 62,315 12 % 264,489 230,325 15 %
Aviation 107,436 94,232 14 % 322,083 294,560 9 %
Auto 214,637 270,064 -21 % 655,963 789,870 -17 %
Gross profit % 56.2 % 53.3 % 56.0 % 55.2 %
Operating profit % 22.1 % 18.5 % 21.5 % 19.8 %
GAAP diluted EPS $ 0.66 $ 0.63 5 % $ 1.98 $ 1.69 17 %
Pro forma diluted EPS (1) $ 0.75 $ 0.51 47 % $ 2.10 $ 1.75 20 %
(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 39-weeks
ended Sept 26, 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:

“Our strong year continued in the third quarter of 2016, reporting solid
results with four of our five business segments delivering double digit
sales growth and increased profitability,” said Cliff Pemble, president
and chief executive officer (CEO) of Garmin Ltd. “We are excited to see
the continued positive customer reception of our fitness and outdoor
wearables. Aviation and marine also achieved impressive double-digit
growth on strong product offerings. We are maintaining our focus on
innovation, diversification and market expansion to drive further growth
opportunities in all business segments. Given the strong revenue and
margin performance in the third quarter, we are raising our revenue and
EPS guidance for the full year.”


Fitness:

The fitness segment posted strong revenue growth of 32% in the quarter
driven by wrist heart rate wearable devices and cycling. Gross margin
increased year-over-year to 55%, while operating margin improved to 24%
resulting in a 68% growth in operating income. During the quarter, we
began shipping both the recently announced Forerunner® 35, bringing
Garmin ElevateTM wrist based heart rate technology to an
affordable, sleek, easy-to-use GPS device, and vívofit® jr., our first
kid inspired activity tracker featuring a comfortable design, one+ year
battery life and a parent controlled mobile app created to help motivate
kids to stay active.


Outdoor:

The outdoor segment achieved strong revenue growth of 28% driven
primarily by wearable devices. Gross margin increased year-over-year to
63%, while operating margin improved to 35% resulting in a 32% increase
in operating income. We recently launched our fēnix® Chronos line,
crafted from premium jeweler’s grade materials to suit every style
without sacrificing the rugged multisport capabilities customers have
come to recognize within our fēnix line.


Marine:

The marine segment posted solid third quarter revenue growth of 12%
driven by our strong lineup of chart plotters, fish finders, and
entertainment systems. Gross margin increased year-over-year to 57%,
while operating margin improved to 15% resulting in operating income
growth of 80%. For the second year in a row Garmin was recognized as the
Manufacturer of the Year by the NMEA (National Marine Electronics
Association), winning awards across a broad range of product categories.
Garmin also received the prestigious IBEX award in the OEM Electronics
category with our well received, FantomTM marine radar series.


Aviation:

The aviation segment posted solid revenue growth of 14% in the quarter
despite ongoing softness in the overall aviation market. Our performance
was driven by growth in both OEM and Aftermarket sales, which was led by
demand for Automatic Dependent Surveillance Broadcast (ADS-B) systems.
Gross margin was 75% and operating margin improved to 28%, resulting in
operating income growth of 28%. During the quarter, we received
certification and made our first delivery of the G5000TM
integrated flight deck for the Beechjet 400A/Hawker 400XP aircraft.


Auto:

The auto segment recorded revenue decline of 21%, primarily due to the
ongoing PND market contraction and headwinds caused by additional
revenue deferrals associated with certain auto OEM products. Gross
margin improved to 44%, and operating margin was consistent
year-over-year at 12%. During the quarter, we launched the VIRB® Ultra
30, an ultra HD 4K/30fps action camera, built ready for adventure with
voice control, a LCD color touchscreen and high precision sensors and
GPS.


Additional Financial Information:

Total operating expenses in the quarter were $246 million, a 4% increase
from the prior year. Research and development investment increased 10%,
with growth primarily focused on aviation and our active lifestyle
products in fitness and outdoor. Advertising decreased 11%, driven
primarily by year-over-year decreases in auto. Selling, general and
administrative expense increased 3%, but improved as a percent of sales.

The effective tax rate in the third quarter of 2016 was 16.5%, down from
27.6% in the prior year quarter. The decrease in the effective tax rate
is primarily due to projected income mix by jurisdiction compared to the
prior year.

In the third quarter 2016, we generated $199 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 $96 million and our share repurchase activity, which
totaled approximately $20 million in the third quarter. We have
approximately $103 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 approximately $2.4 billion.


2016 Guidance:

Based on our performance in the first three quarters of 2016, we are
updating our full year guidance. We now anticipate revenue of
approximately $2.95 billion, driven primarily by a stronger outlook for
all of our segments except auto. We anticipate our full year pro forma
EPS will be approximately $2.65 based on gross margin of approximately
55%, operating income of approximately $580 million and a full year
effective tax rate of approximately 18.5% (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, October 26, 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 December 29, 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, fēnix, Forerunner, vívofit,
vívosmart and VIRB are trademarks of Garmin Ltd. or its subsidiaries and
are registered in one or more countries, including the U.S.; Garmin
Elevate, Fantom 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 24, Sept 26, Sept 24, Sept 26,
2016 2015 2016 2015
Net sales $ 722,250 $ 679,690 $ 2,157,898 $ 2,038,913
Cost of goods sold 316,270 317,500 949,110 913,352
Gross profit 405,980 362,190 1,208,788 1,125,561
Advertising expense 32,956 36,887 109,441 110,352
Selling, general and administrative expense 96,959 94,057 296,246 290,359
Research and development expense 116,449 105,789 339,008 321,031
Total operating expense 246,364 236,733 744,695 721,742
Operating income 159,616 125,457 464,093 403,819
Other income (expense):
Interest income 8,226 6,851 24,109 22,295
Foreign currency gains (losses) (19,421 ) 30,573 (30,003 ) (14,177 )
Other income 1,344 2,010 2,914 2,707
Total other income (expense) (9,851 ) 39,434 (2,980 ) 10,825
Income before income taxes 149,765 164,891 461,113 414,644
Income tax provision 24,711 45,592 86,904 90,800
Net income $ 125,054 $ 119,299 $ 374,209 $ 323,844
Net income per share:
Basic $ 0.66 $ 0.63 $ 1.98 $ 1.69
Diluted $ 0.66 $ 0.63 $ 1.98 $ 1.69
Weighted average common
shares outstanding:
Basic 188,692 190,342 189,027 191,068
Diluted 189,238 190,822 189,376 191,523
Garmin Ltd. And Subsidiaries

Condensed Consolidated
Balance Sheets

(In thousands, except per share
information)
(Unaudited)
Sept 24, December 26,
2016 2015
Assets
Current assets:
Cash and cash equivalents $ 912,559 $ 833,070
Marketable securities 201,560 215,161
Accounts receivable, net 461,355 531,481
Inventories, net 534,683 500,554
Deferred costs 46,569 49,176
Prepaid expenses and other current assets 90,733 81,645
Total current assets 2,247,459 2,211,087
Property and equipment, net 454,246 446,089
Marketable securities 1,327,347 1,343,387
Restricted cash 265 259
Noncurrent deferred income tax 121,084 116,518
Noncurrent deferred costs 51,395 38,769
Intangible assets, net 301,983 245,552
Other assets 88,127 97,730
Total assets $ 4,591,906 $ 4,499,391
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 148,030 $ 178,905
Salaries and benefits payable 86,104 70,601
Accrued warranty costs 38,872 30,449
Accrued sales program costs 49,172 67,613
Deferred revenue 146,384 164,982
Accrued royalty costs 34,801 30,310
Accrued advertising expense 22,775 33,547
Other accrued expenses 81,313 74,926
Income taxes payable 24,004 21,674
Dividend payable 288,540 192,991
Total current liabilities 919,995 865,998
Deferred income taxes 56,463 56,210
Non-current income taxes 117,276 101,689
Non-current deferred revenue 134,236 128,731
Other liabilities 1,707 1,637
Stockholders’ equity:
Shares, CHF 0.10 par value, 198,077 shares authorized and issued;
and 188,446 shares outstanding at September 24, 2016
Shares, CHF 10.00 par value, 208,077 shares authorized and issued;
and 189,722 shares outstanding at December 26, 2015 17,979 1,797,435
Additional paid-in capital 1,862,801 62,239
Treasury stock (464,163 ) (414,637 )
Retained earnings 1,919,846 1,930,517
Accumulated other comprehensive income 25,766 (30,428 )
Total stockholders’ equity 3,362,229 3,345,126
Total liabilities and stockholders’ equity $ 4,591,906 $ 4,499,391
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
39-Weeks Ended
Sept 24, Sept 26,
2016 2015
Operating activities:
Net income $ 374,209 $ 323,844
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 40,327 37,936
Amortization 22,215 20,447
Loss (gain) on sale or disposal of property and equipment 155 (190 )
Provision for doubtful accounts 2,559 (1,781 )
Deferred income taxes (6,821 ) 5,796
Unrealized foreign currency loss 19,536 30,473
Provision for obsolete and slow moving inventories 20,943 9,925
Stock compensation expense 29,211 19,596
Realized gain on marketable securities (1,068 ) (76 )
Changes in operating assets and liabilities:
Accounts receivable 76,372 123,875
Inventories (41,002 ) (111,008 )
Other current and non-current assets 3,400 (110,695 )
Accounts payable (40,694 ) 16,864
Other current and non-current liabilities 1,942 (44,636 )
Deferred revenue (13,660 ) (49,790 )
Deferred cost (9,906 ) 7,080
Income taxes payable 14,648 (155,529 )
Net cash provided by operating activities 492,366 122,131
Investing activities:
Purchases of property and equipment (42,157 ) (53,297 )
Proceeds from sale of property and equipment 15 670
Purchase of intangible assets (4,706 ) (2,817 )
Purchase of marketable securities (739,676 ) (649,881 )
Redemption of marketable securities 772,733 720,717
Change in restricted cash (6 ) 48
Acquisitions, net of cash acquired (62,137 ) (12,632 )
Net cash (used in) provided by investing activities (75,934 ) 2,808
Financing activities:
Dividends paid (289,331 ) (281,247 )
Purchase of treasury stock under share repurchase plan (65,221 ) (108,057 )
Purchase of treasury stock related to equity awards (184 ) (241 )
Proceeds from issuance of treasury stock related to equity awards 10,210 8,554
Tax benefit from issuance of equity awards 365 1,257
Net cash used in financing activities (344,161 ) (379,734 )
Effect of exchange rate changes on cash and cash equivalents 7,218 (26,566 )
Net increase (decrease) in cash and cash equivalents 79,489 (281,361 )
Cash and cash equivalents at beginning of period 833,070 1,196,268
Cash and cash equivalents at end of period $ 912,559 $ 914,907
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 September 24, 2016
Net sales $ 141,006 $ 189,161 $ 70,010 $ 214,637 $ 107,436 $ 722,250
Gross profit $ 88,497 $ 103,363 $ 39,891 $ 93,638 $ 80,591 $ 405,980
Operating income $ 49,271 $ 44,774 $ 10,332 $ 24,795 $ 30,444 $ 159,616
13-Weeks Ended September 26, 2015
(3)
Net sales $ 109,863 $ 143,216 $ 62,315 $ 270,064 $ 94,232 $ 679,690
Gross profit $ 66,442 $ 77,261 $ 34,115 $ 114,331 $ 70,041 $ 362,190
Operating income $ 37,409 $ 26,577 $ 5,737 $ 32,012 $ 23,722 $ 125,457
39-Weeks Ended September 24, 2016
Net sales $ 370,929 $ 544,434 $ 264,489 $ 655,963 $ 322,083 $ 2,157,898
Gross profit $ 232,652 $ 295,463 $ 148,554 $ 292,770 $ 239,349 $ 1,208,788
Operating income $ 125,721 $ 114,422 $ 49,172 $ 82,984 $ 91,794 $ 464,093
39-Weeks Ended September 26, 2015
(3)
Net sales $ 291,299 $ 432,859 $ 230,325 $ 789,870 $ 294,560 $ 2,038,913
Gross profit $ 181,525 $ 248,795 $ 128,204 $ 351,223 $ 215,814 $ 1,125,561
Operating income $ 98,135 $ 94,286 $ 34,204 $ 99,887 $ 77,307 $ 403,819
(3) Action camera related operating results for the 13-weeks and
39-weeks ended September 26, 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 39-Weeks Ended
Sept 24, Sept 26, Yr over Yr Sept 24, Sept 26, Yr over Yr
2016 2015 Change 2016 2015 Change
Net sales $ 722,250 $ 679,690 6 % $ 2,157,898 $ 2,038,913 6 %
Americas 348,637 335,041 4 % 1,073,610 1,057,359 2 %
EMEA 274,756 261,548 5 % 810,205 744,352 9 %
APAC 98,857 83,101 19 % 274,083 237,202 16 %
EMEA – Europe, Middle East and Africa; APAC – Asia Pacific and
Australian Continent

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 gain or loss and certain income tax adjustments, as
discussed below, is an important measure. The majority of the Company’s
consolidated foreign currency gain or loss is typically driven by
movements in the Taiwan Dollar and the Euro in relation to the U.S.
Dollar and the related exchange rate impact on the significant cash,
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. 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 net release of other uncertain tax position reserves, amounting to
approximately $5.8 million and $7.2 million for the 39-weeks ended
September 24, 2016 and September 26, 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 or are comparable between periods. The
tax effect of foreign currency gains (losses) was calculated using
effective tax rates of 16.5% and 27.6% for the third quarters of 2016
and 2015, respectively and 18.8% and 21.9% 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 Condensed 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 39-Weeks Ended
Sept 24, Sept 26, Sept 24, Sept 26,
2016 2015 2016 2015
Net Income (GAAP) $ 125,054 $ 119,299 $ 374,209 $ 323,844
Foreign currency gains (losses) 19,421 (30,573 ) 30,003 14,177
Tax effect of foreign currency gains (losses) (3,204 ) 8,453 (5,654 ) (3,104 )
Net income (Pro Forma) $ 141,271 $ 97,179 $ 398,558 $ 334,917
Net income per share (GAAP):
Basic $ 0.66 $ 0.63 $ 1.98 $ 1.69
Diluted $ 0.66 $ 0.63 $ 1.98 $ 1.69
Net income per share (Pro Forma):
Basic $ 0.75 $ 0.51 $ 2.11 $ 1.75
Diluted $ 0.75 $ 0.51 $ 2.10 $ 1.75
Weighted average common shares outstanding:
Basic 188,692 190,342 189,027 191,068
Diluted (GAAP) 189,238 190,822 189,376 191,523


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 $0.12 per share for the 39-weeks ended September
24, 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 39-Weeks Ended
Sept 24, Sept 26, Sept 24, Sept 26,
2016 2015 2016 2015
(in thousands)
Net cash provided by operating activities $ 212,994 $ 137,834 $ 492,366 $ 122,131
Less: purchases of property and equipment (13,543 ) (13,565 ) (42,157 ) (53,297 )
Plus: taxes paid related to inter-company restructuring – – – 182,800
Free Cash Flow $ 199,451 $ 124,269 $ 450,209 $ 251,634

 

Contacts

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