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Garmin Reports Second Quarter Revenue and EPS Growth; Raises Guidance

SCHAFFHAUSEN, Switzerland — (BUSINESS WIRE) — July 27, 2016 — Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the second quarter ended June 25, 2016.

Highlights for the second quarter 2016 include:

         
(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  
 


Contact:

Garmin Ltd.
Investor Relations Contact:
Teri Seck, 913-397-8200
Email Contact
or
Media Relations Contact:
Ted Gartner, 913-397-8200
Email Contact