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
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:
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.
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.
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.
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.
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.
