Garmin Reports Strong Revenue & Pro Forma EPS Growth in Third Quarter 2014
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Garmin Reports Strong Revenue & Pro Forma EPS Growth in Third Quarter 2014

SCHAFFHAUSEN, Switzerland — (BUSINESS WIRE) — October 29, 2014 — Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the quarter ended September 27, 2014.

Highlights in the quarter include:

   
(in thousands, 13-Weeks Ended 39-Weeks Ended
except per share data) Sep 27,   Sep 28,   Yr over Yr Sep 27,   Sep 28,   Yr over Yr
2014   2013     Change 2014   2013     Change
Net sales $ 706,283   $ 643,637 10% $ 2,067,352   $ 1,872,156 10%
Automotive/Mobile 307,558 322,520 -5% 900,545 919,810 -2%
Fitness 116,171 81,007 43% 367,137 237,660 54%
Outdoor 121,079 101,350 19% 311,123 284,372 9%
Aviation 99,347 83,459 19% 292,636 251,970 16%
Marine 62,128 55,301 12% 195,911 178,344 10%
 
Gross profit % 56 % 55 % 57 % 54 %
 
Operating profit % 25 % 24 % 25 % 21 %
 
GAAP diluted EPS ($0.76 ) $ 0.96 NM $ 0.79 $ 2.29 -66%
Pro forma diluted EPS (1) $ 0.76 $ 0.69 10% $ 2.33 $ 1.86 25%
 

(1) See attached tables for reconciliation of non GAAP measures including pro forma diluted EPS and free cash flow

 

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

“Our strong year continued with a third consecutive quarter of revenue, operating income and pro forma EPS growth. Our non-automotive/mobile segments delivered 24% revenue growth and 70% of our operating profits. We believe we are well positioned with our current product portfolio while also investing for long-term sustained growth through further innovation and diversification,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “Given the strong revenue and margin performance in the third quarter, we are revising our guidance as we now expect our revenue and pro forma EPS for the full year to be approximately $2.85 billion and $3.10, respectively.”

Outdoor:

The outdoor segment posted revenue growth of 19% in the quarter due to the strong performance of recently introduced products including the fēnix™ 2, the Approach® S6 and the Alpha® series. Gross and operating margins remain strong at 65% and 42%, respectively. The significant revenue growth in the quarter confirms the strength of our product portfolio and will allow us to generate mid-single digit full year growth in the segment. We will continue to expand our offerings in our existing categories and explore additional adjacencies to drive future growth.

Fitness:

The fitness segment posted revenue growth of 43% in the quarter as the strong performance of numerous products and categories continued. Gross margins increased to 64% year-over-year while operating margins were relatively consistent with the prior year due to significant investments in advertising, sponsorships and point of sale displays to drive long-term market share gains. We believe these initiatives are already producing positive results and anticipate strong sales in the holiday quarter and beyond as we build market share in the growing global wearables category. We have recently announced two additional products in the fitness segment that highlight our commitment to innovation – the vívosmart™, our latest activity tracker which delivers smart notifications, and the Forerunner® 920XT, our next generation multisport product with advanced running dynamics and connected features. In the quarter, we also launched Connect IQ™, an open platform for developers to create applications for Garmin wearables like the 920XT. Connect IQ opens the door to a world of possibilities for our active lifestyle customers looking to expand the utility of their Garmin device.

Aviation:

The aviation segment posted revenue growth of 19% in the quarter driven by increased demand across all product categories. The gross and operating margins in aviation were strong at 73% and 29%, respectively. We continue to see projects reach final certification including the Cessna CJ3+ and the Enstrom 480B-G, both now offering Garmin avionics. We also are pursuing additional aftermarket opportunities with the recently introduced stand-alone ADS-B solution for mid-sized business jets and enhanced capabilities for King Air customers considering a Garmin retrofit solution. We believe that these investments, along with new aircraft certifications yet to come, will be key drivers of future growth.

Marine:

The marine segment posted revenue growth of 12% aided by our third quarter acquisition of Fusion® Electronics. Gross margin improved to 51% driving 32% growth in operating income. We expect to build upon the improved performance that we have achieved in 2014 with the launch of our 2015 marine product line-up. At the Fort Lauderdale boat show this week, we are showcasing a comprehensive range of all new products including multi-function displays, chartplotters, radars and autopilots. We believe these products position us well against the competition and should provide the foundation for growth in 2015.

Auto/Mobile:

The automotive/mobile segment posted a revenue decline of 5% due to ongoing PND volume declines. Gross and operating margins in the quarter were 46% and 17%, respectively, consistent with the prior year. In the quarter, we announced an OEM partnership with Honda to provide navigation software for the Civic and CR-V models in Europe, Russia and South America. We are excited to deliver our high-quality, feature-packed navigation solution to Honda’s 2015 line-up while also continuing to pursue additional opportunities to deliver our innovative OEM solutions to the auto industry.

Additional Financial Information:

Total operating expenses in the quarter were $223 million, an 11% increase from the prior year. Research and development investment increased 12%, while remaining consistent as a percentage of sales, driven primarily by fitness and aviation investments to support new product initiatives. Advertising increased 26% as we launched television advertising campaigns and improved point of sale displays with many retailers to support new products in outdoor and fitness. Selling, general and administrative expense increased by 5% while remaining consistent as a percentage of sales in the quarter.

Our third quarter income tax expense was $319 million, including the impact of the $308 million income tax expense associated with our inter-company restructuring, announced in July 2014, and a $24 million income tax benefit associated with net releases of reserves primarily associated with specific uncertain tax positions. Adjusting for these items, our pro forma effective tax rate for the quarter was 21.0%. This compares to a pro forma rate of 15.7% in the prior year when we had reserve releases of $52 million. The pro forma effective tax rate increase is primarily due to income mix across tax jurisdictions, the expiration of certain Taiwan tax holidays and the expiration of the U.S. research and development tax credit. We now anticipate a full year pro forma rate of 17% due primarily to the anticipated delay in approval of the U.S. research and development tax credit.

In the third quarter, we generated $202 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 $92 million and our share repurchase activity which totaled $79 million in the current quarter. We have now fully executed the $300 million share repurchase plan and have returned approximately 100% of our forecasted 2014 free cash flow to shareholders via the dividend and share repurchase. As we have done in recent years, we will reassess our capital return strategy in conjunction with our 2015 guidance in February 2015. We currently have almost $2.8 billion of cash and marketable securities allowing us a significant level of flexibility to utilize our balance sheet to continue to generate long-term shareholder value.

2014 Guidance:

Due to our continued strong results in the third quarter, we are revising our guidance to reflect our outlook for the remainder of the year. We now anticipate revenues of approximately $2.85 billion, the high end of our prior guidance, with gross and operating margins of 56% and 24%, respectively. Given the full year effective tax rate of 17%, we forecast pro forma EPS of approximately $3.10. As indicated last quarter, our guidance anticipates promotional pricing for the holiday season, as well as higher spending in marketing and advertising to support new product categories, resulting in slightly lower margins in the fourth quarter.

Webcast Information/Forward-Looking Statements:

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

  When:   Wednesday, October 29, 2014 at 10:30 a.m. Eastern
Where:

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

How: Simply log on to the web at the address above or call to listen in at 888-312-9865
 

An archive of the live webcast will be available until December 24, 2014 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. Any statements regarding the Company’s estimated earnings and revenue for fiscal 2014, the Company’s expected segment revenue growth rate, margins, new products to be introduced in 2014 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 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 28, 2013 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2013 Form 10-K can be downloaded from http://www.garmin.com/aboutGarmin/invRelations/finReports.html.

Garmin, Approach, Alpha, VIRB, Forerunner and Fusion are registered trademarks and fēnix, vívosmart, and Connect IQ 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 27, Sept 28, Sept 27, Sept 28,
  2014     2013     2014     2013
Net sales $ 706,283 $ 643,637 $ 2,067,352 $ 1,872,156
 
Cost of goods sold   308,037     290,748     893,788     859,494
 
Gross profit 398,246 352,889 1,173,564 1,012,662
 
Advertising expense 33,112 26,251 92,457 77,983
Selling, general and administrative expense 90,632 86,462 272,914 260,769
Research and development expense   98,998     88,427     293,567     272,349
Total operating expense   222,742     201,140     658,938     611,101
 
Operating income 175,504 151,749 514,626 401,561
 
Other income (expense):
Interest income 9,344 8,435 28,781 25,512
Foreign currency gains (losses) (12,703 ) (822 ) (20,266 ) 18,280
Other   517     1,438     707     3,666
Total other income (expense)   (2,842 )   9,051     9,222     47,458
 
Income before income taxes 172,662 160,800 523,848 449,019
 
Income tax provision (benefit)   319,496     (26,869 )   369,882     192
 
Net income (loss)   ($146,834 ) $ 187,669   $ 153,966   $ 448,827
 
Net income (loss) per share:
Basic ($0.76 ) $ 0.96 $ 0.79 $ 2.30
Diluted ($0.76 ) $ 0.96 $ 0.79 $ 2.29
 
Weighted average common
shares outstanding:
Basic 192,239 195,325 193,700 195,488
Diluted 192,239 196,300 194,763 196,312
 
 
Dividends declared per share $ 1.92 $ 1.80
 
Garmin Ltd. And Subsidiaries    
Condensed Consolidated Balance Sheets
(In thousands)
     
(Unaudited)
Sept 27, December 28,
  2014       2013  
Assets
Current assets:
Cash and cash equivalents $ 1,154,558 $ 1,179,149
Marketable securities 151,366 149,862
Accounts receivable, net 478,722 564,586
Inventories, net 466,482 382,226
Deferred income taxes 59,186 69,823
Deferred costs 52,113 57,368
Loan receivable - 137,379
Prepaid expenses and other current assets   59,058     55,243  
Total current assets 2,421,485 2,595,636
 
Property and equipment, net 431,753 414,848
 
Marketable securities 1,453,047 1,502,106
Restricted cash 293 249
Noncurrent deferred income tax 84,345 88,324
Noncurrent deferred costs 35,272 41,157
Other intangible assets, net 221,566 219,494
Other assets   21,603     17,789  
Total assets $ 4,669,364   $ 4,879,603  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 144,882 $ 146,582
Salaries and benefits payable 67,496 59,794
Accrued warranty costs 26,543 26,767
Accrued sales program costs 38,699 50,903
Deferred revenue 210,621 256,908
Accrued royalty costs 52,558 64,538
Accrued advertising expense 23,480 19,448
Other accrued expenses 77,157 65,657
Deferred income taxes 6,823 989
Income taxes payable 197,846 38,043
Dividend payable   277,378     175,675  
Total current liabilities 1,123,483 905,304
 
Deferred income taxes 36,073 1,758
Non-current income taxes 135,911 140,933
Non-current deferred revenue 136,025 171,012
Other liabilities 1,459 890
 
Stockholders' equity:
Shares, CHF 10 par value, 208,077 shares authorized and issued;
191,227 shares outstanding at September 27, 2014
and 195,150 shares outstanding at December 28, 2013 1,797,435 1,797,435
Additional paid-in capital 92,144 79,263
Treasury stock (350,063 ) (120,620 )
Retained earnings 1,649,727 1,865,587
Accumulated other comprehensive income   47,170     38,041  
Total stockholders' equity   3,236,413     3,659,706  
Total liabilities and stockholders' equity $ 4,669,364   $ 4,879,603  
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
    39-Weeks Ended
Sept 27,   Sept 28,
  2014     2013  
Operating Activities:
Net income $ 153,966 $ 448,827
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 35,860 36,840
Amortization 19,705 23,629
(Gain) loss on sale of property and equipment (742 ) 41
Provision for doubtful accounts 778 1,023
Deferred income taxes 55,235 2,851
Unrealized foreign currency loss (gain) 22,610 (17,273 )
Provision for obsolete and slow moving inventories 21,051 15,965
Stock compensation expense 18,988 15,608
Realized loss (gain) on marketable securities 685 (2,963 )
Changes in operating assets and liabilities:
Accounts receivable 74,323 128,098
Inventories (107,273 ) (44,337 )
Other current and non-current assets 1,528 (18,329 )
Accounts payable (3,209 ) 21,936
Other current and non-current liabilities (1,997 ) (60,719 )
Deferred revenue (80,712 ) (22,613 )
Deferred cost 11,136 (57 )
Income taxes payable   155,762     (48,256 )
Net cash provided by operating activities 377,694 480,271
 
Investing activities:
Purchases of property and equipment (54,829 ) (41,325 )
Proceeds from sale of property and equipment 748 65
Purchase of intangible assets (9,422 ) (1,574 )
Purchase of marketable securities (746,305 ) (716,226 )
Redemption of marketable securities 807,778 578,464
Proceeds from repayment (advances) on loan receivable 137,379 (173,708 )
Change in restricted cash (44 ) 584
Acquisitions, net of cash acquired   (18,871 )   (5,686 )
Net cash provided by (used in) investing activities 116,434 (359,406 )
 
Financing activities:
Dividends paid (268,023 ) (263,857 )
Purchase of treasury stock under share repurchase plan (241,460 ) (26,926 )
Purchase of treasury stock related to equity awards (11,274 ) (7,430 )
Proceeds from issuance of treasury stock related to equity awards 12,761 13,620
Tax benefit from issuance of equity awards   4,422     411  
Net cash used in financing activities (503,574 ) (284,182 )
 
Effect of exchange rate changes on cash and cash equivalents (15,145 ) 837
   
Net decrease in cash and cash equivalents (24,591 ) (162,480 )
Cash and cash equivalents at beginning of period   1,179,149     1,231,180  
Cash and cash equivalents at end of period $ 1,154,558   $ 1,068,700  
 
Garmin Ltd. And Subsidiaries
Revenue, Gross Profit, and Operating Income by Segment (Unaudited)
           
Reporting Segments
Auto/
Outdoor Fitness Marine Mobile Aviation Total
 
13-Weeks Ended Sep 27, 2014
 
Net sales $ 121,079 $ 116,171 $ 62,128 $ 307,558 $ 99,347 $ 706,283
Gross profit $ 79,227 $ 74,056 $ 31,510 $ 140,995 $ 72,458 $ 398,246
Operating income $ 51,382 $ 36,670 $ 5,452 $ 53,042 $ 28,958 $ 175,504
 
13-Weeks Ended Sep 28, 2013
 
Net sales $ 101,350 $ 81,007 $ 55,301 $ 322,520 $ 83,459 $ 643,637
Gross profit $ 69,471 $ 49,328 $ 27,265 $ 147,866 $ 58,959 $ 352,889
Operating income $ 44,107 $ 26,493 $ 4,118 $ 53,848 $ 23,183 $ 151,749
                         
 
39-Weeks Ended Sep 27, 2014
 
Net sales $ 311,123 $ 367,137 $ 195,911 $ 900,545 $ 292,636 $ 2,067,352
Gross profit $ 194,805 $ 236,204 $ 105,097 $ 422,379 215,079 $ 1,173,564
Operating income $ 110,345 $ 133,054 $ 26,919 $ 158,248 $ 86,060 $ 514,626
 
39-Weeks Ended Sep 28, 2013
 
Net sales $ 284,372 $ 237,660 $ 178,344 $ 919,810 $ 251,970 $ 1,872,156
Gross profit $ 184,333 $ 149,368 $ 91,550 $ 410,348 $ 177,063 $ 1,012,662
Operating income $ 110,538 $ 76,026 $ 16,089 $ 134,324 $ 64,584 $ 401,561
 
Garmin Ltd. And Subsidiaries
Revenue by Geography (Unaudited)
           
13-Weeks Ended 39-Weeks Ended
Sep 27, Sep 28, Yr over Yr Sep 27, Sep 28, Yr over Yr
2014   2013   Change   2014   2013   Change
Net sales $ 706,283 $ 643,637 10% $ 2,067,352 $ 1,872,156 10%
Americas 374,111 333,448 12% 1,090,267 1,002,796 9%
EMEA 260,830 245,659 6% 781,860 692,836 13%
APAC 71,342 64,530 11% 195,225 176,524 11%
 
EMEA - Europe, Middle East and Africa; APAC - Asia Pacific
 

Non-GAAP Financial Information

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 transactions involving the Euro, the British Pound Sterling and the Taiwan Dollar and from the exchange rate impact of the significant cash and marketable securities, receivables and payables held in U.S. dollars at the end of each reporting period by the Company’s various non-U.S. subsidiaries. Such gain or loss is required under GAAP because the functional currency of the subsidiaries differs from the currency in which various assets and liabilities are held. 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 effecting 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 $11 million and $10 million for the 39-weeks ended September 27, 2014 and September 28, 2013, 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. In the third quarter of 2014, the company incurred tax expense of $308 million associated with our inter-company restructuring. As this is a one-time transaction and not reflective of income tax expense incurred related to the current period earnings, it has been excluded from pro forma net income (earnings) per share. 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 permits a consistent comparison of the Company’s operating performance between periods.

 
Garmin Ltd. And Subsidiaries
Net income per share (Pro Forma)
(in thousands, except per share information)
       
13-Weeks Ended 39-weeks Ended
Sep 27, Sep 28, Sep 27, Sep 28,
  2014       2013     2014       2013  
 
Net Income (Loss) (GAAP) ($146,834 ) $ 187,669 $ 153,966 $ 448,827
Foreign currency (gain) / loss, net of tax effects $ 10,035 $ 693 $ 16,957 ($15,475 )
Income tax benefit due to completion of tax audits
and/or expiration of statutes ($24,400 ) ($52,180 ) ($24,400 ) ($68,716 )
Tax due to inter-company restructuring $ 307,635       -   $ 307,635       -  
Net income (Pro Forma) $ 146,436     $ 136,182   $ 454,158     $ 364,636  
 
Weighted average common shares outstanding:
Basic 192,239 195,325 193,700 195,488
Diluted (GAAP) (1) 192,239 196,300 194,763 196,312
Diluted (Pro Forma) 193,341 196,300 194,763 196,312
 
Net income (loss) per share (GAAP):
Basic ($0.76 ) $ 0.96 $ 0.79 $ 2.30
Diluted ($0.76 ) $ 0.96 $ 0.79 $ 2.29
 
Net income per share (Pro Forma):
Basic $ 0.76 $ 0.70 $ 2.34 $ 1.87
Diluted $ 0.76 $ 0.69 $ 2.33 $ 1.86
 

(1) Per US GAAP, dilutive shares are excluded from the calculation of GAAP EPS in a net loss position as the dilutive impact becomes anti-dilutive, reducing the loss 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.

 
Free Cash Flow
(in thousands)
     
13-Weeks Ended 39-weeks Ended
Sep 27, Sep 28, Sep 27, Sep 28,
  2014       2013     2014       2013  
 
Net cash provided by operating activities $ 142,342 $ 216,609 $ 377,694 $ 480,271
Less: purchases of property and equipment ($18,066 ) ($11,602 ) ($54,829 ) ($41,325 )
Plus: taxes paid related to inter-company restructuring $ 78,137       -   $ 78,137       -  
Free Cash Flow $ 202,413     $ 205,007   $ 401,002     $ 438,946  
 


Contact:

Garmin Ltd.
Investor Relations Contact:
Kerri Thurston, 913-397-8200
Email Contact
or
Media Relations Contact:
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