Garmin Reports Third Quarter Revenue and EPS Growth; Raises Guidance

Category:

Wednesday, October 26, 2016 6:00 am CDT

Dateline:

SCHAFFHAUSEN, Switzerland

Public Company Information:

NASDAQ:
GRMN
KYG372601099
"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"

SCHAFFHAUSEN, Switzerland--(BUSINESS WIRE)--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  

Contact:

Garmin Ltd.
Investor Relations Contact:
Teri Seck, 913-397-8200
investor.relations@garmin.com
or
Media Relations Contact:
Ted Gartner, 913-397-8200
media.relations@garmin.com

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