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Corporate earnings
Wednesday, 3 May 2017, 12:00 am CDT

Garmin Reports First Quarter Revenue and Earnings Growth

Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the first
quarter ended April 1, 2017.

Highlights for the first quarter 2017 include:

  • Total revenue of $639 million, growing 2% over the prior year, with
    marine, outdoor, aviation and fitness collectively growing 12% over
    the prior year quarter and contributing 75% of total revenue
  • Gross margin improved to 58.3% compared to 54.5% in the prior year
    quarter
  • Operating margin improved to 18.2% compared to 16.6% in the prior year
    quarter
  • Operating income grew 12%
  • GAAP EPS was $1.26 and pro forma EPS(1) was $0.52
  • Began shipping the highly anticipated fēnix® 5 adventure watch series,
    with three watch designs appealing to a broader range of wrist sizes
    and style preferences
  • Launched the Forerunner 935 multisport watch, and introduced the
    vívosmart® 3 with all-day stress tracking
(in thousands, 13-Weeks Ended
except per share data) April 1, March 26, Yr over Yr
2017 2016 Change
Net sales $ 638,546 $ 624,040 2 %
Marine 104,445 82,880 26 %
Outdoor 115,875 96,827 20 %
Aviation 122,871 106,316 16 %
Fitness 137,831 142,418 -3 %
Auto 157,524 195,599 -19 %
Gross margin % 58.3 % 54.5 %
Operating income % 18.2 % 16.6 %
GAAP diluted EPS $ 1.26 $ 0.46 171 %

Pro forma diluted EPS(1)

 $ 0.52 $ 0.49 7 %

(1)

See attached table for reconciliation of non-GAAP measures
including pro forma diluted EPS


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

“We continued our trend of consolidated revenue growth led by double
digit growth in our marine, outdoor and aviation segments,” said Cliff
Pemble, president and chief executive officer of Garmin Ltd. “The
fitness segment declined slightly due to the rapidly maturing market for
basic activity trackers. However, demand for advanced wearables remains
strong. Our product development pipeline is robust and we look forward
to launching compelling new products throughout the remainder of the
year.”


Marine:

The marine segment posted robust revenue growth of 26% driven by our
solid lineup of chartplotters, fishfinders and entertainment products.
Gross margin increased year-over-year to 57% with product mix shifting
toward new products with higher margin profiles. Operating margin
improved to 17%, resulting in 76% operating income growth. During the
first quarter of 2017, we started shipping our new touchscreen and keyed
chartplotter combo offerings in our popular GPSMAP® product line, with
positive customer reception. We remain focused on innovations and
achieving market share gains within the inland fishing category.


Outdoor:

During the first quarter of 2017, the outdoor segment grew 20% with
significant contributions from wearable devices. Gross margin improved
to 63% while operating margin improved to 30%, resulting in 24%
operating income growth. We began shipping our highly anticipated fēnix®
5 adventure watch series late in the first quarter as well as the new
Garmin branded inReach handhelds.


Aviation:

The aviation segment posted solid first quarter revenue growth of 16%,
primarily driven by growth in aftermarket products. Gross and operating
margins were strong at 74% and 31%, respectively, resulting in 27%
operating income growth. During the quarter, we began shipping the
G1000® NXi, the next generation integrated flight deck, expanded the
market for our ADS-B products with the European Aviation Safety Agency
certification of the GTX 345 and continued to enhance our portfolio of
safety enhancing products with the G5, a cost-effective solution for
electronic flight instruments. We will continue to focus on ADS-B and
other global regulatory mandate opportunities that exist and gaining
market share in the OEM market.


Fitness:

During the first quarter of 2017, the fitness segment posted a revenue
decline of 3% driven by lower volume in basic activity trackers
partially offset by growth in our advanced wearables with GPS. Gross and
operating margins increased year-over-year to 56% and 13%, respectively,
resulting in an 11% growth in operating income. During the first
quarter, we launched the Forerunner 935, our most advanced multisport
watch with performance monitoring tools and introduced the vívosmart 3,
an ultra-slim smart activity tracker with wrist based heart rate and
innovative all-day stress tracking. While the market for basic activity
trackers has matured rapidly over the past year, we continue to see
opportunities within the advanced wearable with GPS category and are
confident in our product roadmap for the remainder of 2017.


Auto:

The auto segment recorded revenue decline of 19% in the first quarter of
2017, primarily due to the ongoing PND market contraction partially
offset by growth in our Auto OEM product lines. Gross margin remained
constant at 44%, while operating margin declined year-over-year to 4%.
During the first quarter of 2017, we began shipping the next generation
Drive series PNDs, offering expanded safety and driver awareness
features with WiFi capability, and introduced the Dash Cam 45 and 55,
offering a high-quality recording in a compact form factor.


Additional Financial Information:

Total operating expenses in the quarter were $256 million, an 8%
increase from the prior year. Research and development increased 13%
driven by aviation and advanced wearable products in fitness and
outdoor. Selling, general and administrative expenses increased 7%
driven primarily by legal related expenses and information technology
costs. Advertising was relatively flat year-over-year.

In the first quarter of 2017, we reported a $150 million income tax
benefit. Excluding the $169 million income tax benefit due to the
revaluation of certain Switzerland deferred tax assets, our pro forma
effective tax rate for the first quarter of 2017 was 21.3% compared to
an effective tax rate of 18.1% in the prior year. The year-over-year
increase in the pro forma effective tax rate is primarily due to the
Company’s election in February 2017 to align certain Switzerland
corporate tax positions with evolving international tax initiatives.

In the first quarter of 2017, we generated $95 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 repurchases activity, which
totaled approximately $28 million in the first quarter of 2017. We have
approximately $47 million remaining in the share repurchase program
authorized through December 31, 2017, and expect to repurchase Company
stock as business and market conditions warrant. We ended the quarter
with cash and marketable securities of approximately $2.3 billion.

As announced in February 2017, the Board will recommend to the
shareholders for approval at the annual meeting to be held on June 9,
2017 a cash dividend in the total amount of $2.04 per share (subject to
possible adjustment based on the total amount of the dividend in Swiss
Francs as approved at the annual meeting), payable in four equal
installments on dates to be approved by the Board.


2017 Guidance:

We are maintaining our 2017 guidance of approximately $3.02 billion of
revenue and approximately $2.65 of pro forma EPS.


Webcast Information/Forward-Looking Statements:

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

When: Wednesday, May 3, 2017 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 July 6, 2017 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 effective tax rate, and the Company’s
expected segment revenue growth rates, consolidated revenue, gross
margins, operating margins, currency movements, expenses, pricing, new
products to be introduced in 2017, statements relating to possible
future dividends 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 31, 2016 filed by Garmin with the Securities and Exchange
Commission (Commission file number 0-31983). A copy of Garmin’s 2016
Form 10-K can be downloaded from

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

.

Garmin, the Garmin logo, the Garmin delta, DeLorme, fēnix, GPSMAP and
vívofit are trademarks of Garmin Ltd. or its subsidiaries and are
registered in one or more countries, including the U.S.; Garmin Elevate
and QuickFit 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
April 1, March 26,
2017 2016
Net sales $ 638,546 $ 624,040
Cost of goods sold 266,423 284,190
Gross profit 372,123 339,850
Advertising expense 31,525 32,233
Selling, general and administrative expense 102,051 95,610
Research and development expense 122,202 108,204
Total operating expense 255,778 236,047
Operating income 116,345 103,803
Other income (expense):
Interest income 8,444 7,428
Foreign currency losses (37,497 ) (4,839 )
Other income 400 1,155
Total other income (expense) (28,653 ) 3,744
Income before income taxes 87,692 107,547
Income tax (benefit) provision (150,120 ) 19,455
Net income $ 237,812 $ 88,092
Net income per share:
Basic $ 1.26 $ 0.46
Diluted $ 1.26 $ 0.46

Weighted average common shares outstanding:

Basic 188,333 189,497
Diluted 189,031 189,651
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share information)
(Unaudited)
April 1, December 31,
2017 2016
Assets
Current assets:
Cash and cash equivalents $ 833,577 $ 846,883
Marketable securities 258,400 266,952
Accounts receivable, net 391,345 527,062
Inventories, net 533,151 484,821
Deferred costs 46,124 47,395
Prepaid expenses and other current assets 94,313 89,903
Total current assets 2,156,910 2,263,016
Property and equipment, net 503,840 482,878
Marketable securities 1,211,141 1,213,285
Restricted cash 117 113
Noncurrent deferred income tax 283,440 110,293
Noncurrent deferred costs 57,579 56,151
Intangible assets, net 303,414 305,002
Other assets 84,240 94,395
Total assets $ 4,600,681 $ 4,525,133
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 136,901 $ 172,404
Salaries and benefits payable 69,892 88,818
Accrued warranty costs 34,427 37,233
Accrued sales program costs 46,468 80,953
Deferred revenue 140,452 146,564
Accrued royalty costs 26,006 36,523
Accrued advertising expense 17,039 37,440
Other accrued expenses 79,986 70,469
Income taxes payable 20,288 16,163
Dividend payable – 96,168
Total current liabilities 571,459 782,735
Deferred income taxes 62,593 61,220
Non-current income taxes 124,265 121,174
Non-current deferred revenue 138,665 140,407
Other liabilities 1,637 1,594
Stockholders’ equity:

Shares, CHF 0.10 par value, 198,077 shares authorized and issued;
188,156 shares outstanding at April 1, 2017 and 188,565 shares
outstanding at December 31, 2016

17,979 17,979
Additional paid-in capital 1,831,824 1,836,047
Treasury stock (474,859 ) (455,964 )
Retained earnings 2,294,654 2,056,702
Accumulated other comprehensive income 32,464 (36,761 )
Total stockholders’ equity 3,702,062 3,418,003
Total liabilities and stockholders’ equity $ 4,600,681 $ 4,525,133
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
13-Weeks Ended
April 1, March 26,
2017 2016
Operating activities:
Net income $ 237,812 $ 88,092
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 14,658 13,078
Amortization 7,070 7,115
Loss on sale or disposal of property and equipment 8 38
Provision for doubtful accounts (294 ) 285
Deferred income taxes (171,523 ) 3,906
Unrealized foreign currency loss (gain) 42,281 (5,412 )
Provision for obsolete and slow moving inventories 7,193 8,026
Stock compensation expense 8,206 8,172
Realized loss (gain) on marketable securities 291 (452 )
Changes in operating assets and liabilities:
Accounts receivable 135,253 130,036
Inventories (41,398 ) (18,873 )
Other current and non-current assets 7,534 (3,937 )
Accounts payable (44,180 ) (45,515 )
Other current and non-current liabilities (81,038 ) (31,606 )
Deferred revenue (8,375 ) (12,337 )
Deferred cost (46 ) (2,496 )
Income taxes payable 6,943 (8,733 )
Net cash provided by operating activities 120,395 129,387
Investing activities:
Purchases of property and equipment (25,538 ) (13,908 )
Proceeds from sale of property and equipment 7 –
Purchase of intangible assets (1,222 ) (1,716 )
Purchase of marketable securities (96,049 ) (151,070 )
Redemption of marketable securities 109,526 237,464
Change in restricted cash (4 ) (2 )
Acquisitions, net of cash acquired – (62,137 )
Net cash (used in) provided by investing activities (13,280 ) 8,631
Financing activities:
Dividends paid (96,028 ) (96,566 )
Purchase of treasury stock under share repurchase plan (27,873 ) (19,796 )
Purchase of treasury stock related to equity awards (3,452 ) (16 )
Proceeds from issuance of treasury stock related to equity awards – 103
Tax benefit from issuance of equity awards – 2
Net cash used in financing activities (127,353 ) (116,273 )
Effect of exchange rate changes on cash and cash equivalents 6,932 2,864
Net increase (decrease) in cash and cash equivalents (13,306 ) 24,609
Cash and cash equivalents at beginning of period 846,883 833,070
Cash and cash equivalents at end of period $ 833,577 $ 857,679
Garmin Ltd. And Subsidiaries
Net Sales, Gross Profit, and Operating Income by Segment
(Unaudited)
(In thousands)
Reportable Segments

Marine
Outdoor
Aviation
Fitness
Auto
Total
13-Weeks Ended April 1, 2017
Net sales $ 104,445 $ 115,875 $ 122,871 $ 137,831 $ 157,524 $ 638,546
Gross profit $ 59,747 $ 73,469 $ 91,233 $ 77,741 $ 69,933 $ 372,123
Operating income $ 18,145 $ 34,451 $ 38,608 $ 18,472 $ 6,669 $ 116,345
13-Weeks Ended March 26, 2016
Net sales $ 82,880 $ 96,827 $ 106,316 $ 142,418 $ 195,599 $ 624,040
Gross profit $ 44,149 $ 58,932 $ 78,331 $ 72,294 $ 86,144 $ 339,850
Operating income $ 10,293 $ 27,885 $ 30,486 $ 16,573 $ 18,566 $ 103,803
Garmin Ltd. And Subsidiaries
Net Sales by Geography (Unaudited)
(In thousands)
13-Weeks Ended
April 1, March 26, Yr over Yr
2017 2016 Change
Net sales $ 638,546 $ 624,040 2 %
Americas 320,189 317,957 1 %
EMEA 226,795 225,728 0 %
APAC 91,562 80,355 14 %
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, pro forma effective tax rate 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 effective tax rate

The Company’s income tax expense is periodically impacted by discrete
tax items that are not reflective of income tax expense incurred as a
result of current period earnings. Therefore, the effective tax rate and
income tax provision before the effect of such discrete tax items are
important measures in order to permit consistent comparison between
periods. In fiscal 2016, there were no such discrete tax items
identified.

Garmin Ltd. And Subsidiaries
Effective tax rate (Pro Forma)
(in thousands, except effective tax rate (ETR) information)
13-Weeks Ended
April 1,
2017
$

ETR
(1)
GAAP income tax (benefit) provision ($150,120 ) (171.2 %)
Discrete tax items:
Revaluation of deferred tax asset(2) 168,755
Total discrete tax items 168,755
Income tax provision (Pro Forma) $ 18,635 21.3 %

(1)

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.

(2)

In first quarter 2017, a $169 million tax benefit was recognized
resulting from the revaluation of certain Switzerland deferred tax
assets. The revaluation is due to the Company’s election in
February 2017 to align certain Switzerland corporate tax positions
with international tax initiatives. As this revaluation is not
reflective of income tax expense incurred related to the current
period earnings, and therefore affects period to period
comparability, it has been identified as a discrete tax item.

The net release of uncertain tax position reserves, amounting to
approximately $1.0 million and $3.8 million in the first quarter 2017
and 2016, respectively, have not been included as pro forma adjustments
in the above presentation of pro forma income tax provision as such
amounts tend to be more recurring in nature, and do not affect
comparability between periods.


Pro forma net income (earnings) per share

Management believes that net income (earnings) per share before the
impact of foreign currency gains or losses and certain discrete income
tax items, as discussed above, is an important measure in order to
permit a consistent comparison of the Company’s performance between
periods.

Garmin Ltd. And Subsidiaries
Net income per share (Pro Forma)
(in thousands, except per share information)
13-Weeks Ended
April 1, March 26,
2017 2016
Net Income (GAAP) $ 237,812 $ 88,092
Foreign currency losses(1) 37,497 4,839
Tax effect of foreign currency losses(2) (7,969 ) (876 )
Discrete tax items(3) (168,755 ) –
Net income (Pro Forma) $ 98,585 $ 92,055
Net income per share (GAAP):
Basic $ 1.26 $ 0.46
Diluted $ 1.26 $ 0.46
Net income per share (Pro Forma):
Basic $ 0.52 $ 0.49
Diluted $ 0.52 $ 0.49
Weighted average common shares outstanding:
Basic 188,333 189,497
Diluted (GAAP) 189,031 189,651

(1)

The majority of the Company’s consolidated foreign currency gains
and losses are typically driven by movements in the Taiwan Dollar,
Euro, and British Pound Sterling 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 gains and
losses.

(2)

The tax effect of foreign currency gains and losses was calculated
using the pro forma effective tax rate of 21.3% and an effective
tax rate of 18.1% for the first quarters of 2017 and 2016,
respectively.

(3)

The discrete tax items are discussed in the Pro forma Effective
Tax Rate section above.


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
less capital expenditures for property and equipment.

Garmin Ltd. And Subsidiaries
Free Cash Flow
(in thousands)
13-Weeks Ended
April 1, March 26,
2017 2016
Net cash provided by operating activities $ 120,395 $ 129,387
Less: purchases of property and equipment (25,538 ) (13,908 )
Free Cash Flow $ 94,857 $ 115,479


Forward-looking pro forma earnings per share (EPS)

Forward-looking pro forma earnings per share excludes the effect of
certain discrete tax items and foreign currency gains and losses.

As discussed in the Pro Forma Net Income (Earnings) Per Share section
above, management believes that net income (earnings) per share before
the impact of foreign currency gains or losses is an important measure
in order to permit a consistent comparison of the Company’s performance
between periods. The estimated impact of such foreign currency gains and
losses cannot be reasonably estimated 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 $0.16 per share for the 13-weeks ended
April 1, 2017.

Management believes certain discrete tax items may not be reflective of
income tax expense incurred related to current period earnings.
Therefore, in order to permit consistent comparison between periods,
earnings per share before the effect of such discrete tax items is an
important measure. In fiscal 2017, management believes certain discrete
tax items will be recognized on a GAAP basis that will have an effect on
the EPS comparability between periods:

  • The fiscal 2017 pro forma EPS excludes certain tax effects from
    share-based compensation as a result of Accounting Standards Update
    No. 2016-09, Compensation – Stock Compensation (Topic 718):
    Improvements to Employee Share-Based Accounting (“ASU 2016-09”), which
    may have a material effect on the GAAP-basis effective tax rate.
    However, the Company is unable to project these amounts due to the
    dependency of this item on the underlying share price of the Company.
    The tax effect of ASU 2016-09 was immaterial for the 13-weeks ended
    April 1, 2017.
  • The fiscal 2017 pro forma EPS excludes the $169 million income tax
    benefit resulting from the revaluation of certain Switzerland deferred
    tax assets as discussed in the Pro Forma Effective Tax Rate section
    above. The impact of this discrete tax item was ($0.89) per share for
    the 13-weeks ended April 1, 2017.

While management expects the above to have a significant impact on
comparability, management is unable to determine if additional
significant discrete tax items will be identified in fiscal 2017.

 

Contacts

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