SYS-CON MEDIA Authors: Sean Houghton, Glenn Rossman, Ignacio M. Llorente, Xenia von Wedel, Peter Silva

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Garmin Reports EPS Growth in First Quarter 2014 with Strong Revenue and Margins

Garmin Ltd. (Nasdaq: GRMN) today announced results for the fiscal year and quarter ended March 29, 2014.

Highlights in the quarter include:

  • Total revenue of $583 million in first quarter 2014 with outdoor, fitness, aviation and marine delivering 58% of total revenues and growing 22% over the year ago quarter
  • Gross and operating profit margins improved from the prior year quarter to 57% and 21%, respectively
  • Pro forma EPS growth of 38%, or $0.55 for first quarter 2014
  • Delivered vívofit™, our first fitness band, in the rapidly growing activity monitor category
  • Announced the G3X™ Touch for the experimental and light-sport aircraft markets with five OEM partners at launch
(in thousands,     13-Weeks Ended
except per share data) Mar 29,     Mar 30,     Yr over Yr
2014 2013     Change
Net sales $583,221 $531,957 10%
Automotive/Mobile 242,952 252,589 -4%
Outdoor 83,985 76,165 10%
Aviation 95,994 80,470 19%
Fitness 100,288 72,437 38%
Marine 60,002 50,296 19%
 
Gross profit % 57% 52%
 
Operating profit % 21% 15%
 
Pro forma diluted EPS (1) $0.55 $0.40 38%

(1) See attached table for reconciliation of GAAP EPS to pro forma diluted EPS

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

“We have had a great start to 2014 with revenue, operating income and pro forma EPS growth; yet, we realize that we cannot be complacent,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “The markets that we serve are dynamic and competitive so we must capitalize on our strong portfolio of products in 2014 while also identifying new opportunities and innovations that will provide future growth potential.”

Outdoor:

The outdoor segment posted revenue growth of 10% in the quarter with all major categories contributing to growth. Gross and operating margins within the segment remained strong at 61% and 28%, respectively, in the quarter. We continued to build on our broad portfolio of outdoor products with the introduction of the fēnix™ 2 and the PRO series of dog collars in the quarter. The fēnix 2 builds off the success of its predecessor with the addition of advanced fitness training features and smartphone connectivity. The PRO series of dog collars takes proven Tri-Tronics® design and offers new functionality for the sport dog market. In addition, we launched advertising and sponsorships to support the VIRB™ action cameras. We are determined to win market share in the category with our innovative products and future enhancements.

Fitness:

The fitness segment posted revenue growth of 38% in the quarter with the Forerunner® 220 and 620 continuing to make strong contributions and a solid mid-quarter launch for vívofit. Both gross and operating margins improved to 64% and 33%, respectively, as mix shifted to new products and sales growth outpaced research and development and advertising growth. We are excited about the strong market reception for our new products and recognize that innovation and design are key to winning and retaining customers in the rapidly growing, but crowded, fitness and wellness markets. We bring years of experience to the market and we are committed to being the leader for both athletes and novices. With the athlete in mind, we introduced the Edge® 1000 recently. This high-end cycling computer combines our best-in-class features of legacy products with a large capacitive touch screen display, real-time competitive segment capabilities and smartphone connectivity.

Aviation:

The aviation segment posted revenue growth of 19% in the quarter with both OEM and aftermarket contributing to revenue improvement. The gross and operating margins in aviation were strong at 74% and 30%, respectively. During the quarter, we continued to enhance our portfolio of products with the addition of portable weather receivers, angle of attack technology and radar altimeter solutions. In addition, we announced the G3X Touch with five OEM partners offering the avionics solution in thirteen models, and we expanded our relationship with Cessna offering the G3000 in the updated CJ3+ and Alpine Edition CJ2+.

Marine:

The marine segment posted revenue growth of 19% as the year ago quarter was particularly weak and demand improved for our line-up of new products including autopilot solutions, chartplotters, and radars. Gross margins improved year-over-year to 52% in the quarter with product mix shifting toward new products with higher margin profiles. Operating margins improved significantly in the quarter with improved research and development efficiency following the delivery of many new products in the past year. There is much work ahead as we continue to innovate, gain market share and improve our profitability.

Auto/Mobile:

The automotive/mobile segment posted a revenue decline of 4% as PND sales continued to decline as we expected but were partially offset by amortization of previously deferred revenue and growing OEM revenues. Gross and operating margins in the quarter were 47% and 13%, respectively, representing an improvement over the prior year due to the amortization of high margin deferred revenue. Though PND volumes are expected to decline throughout 2014, we are pleased with our market share and profitability in the industry. In addition, many of our niche categories, like dash cams and RV units, are helping to offset the PND volume decline. Finally, the OEM market remains a key focus and area of investment that we believe will generate opportunities for future growth.

Additional Financial Information:

Total operating expenses in the quarter were $210 million, a 7% increase from the prior year. Research and development investment increased 10% driven by aviation, fitness and outdoor growth to support new product initiatives while marine and automotive/mobile declined. Advertising also increased 10% as we launched campaigns to support new products in outdoor and marine. Selling, general and administrative expense increased by 4% but declined as a percentage of sales in the quarter.

The effective tax rate in first quarter 2014 was 16.6% compared to 11.6%, on an adjusted basis, in the prior year due to the retroactive research and development credit recognized in first quarter 2013.

In the first quarter, we generated $56 million of free cash flow (see attached table for reconciliation of this non-GAAP measure) which is consistent with our expectations. We continued to return cash to shareholders with our quarterly dividend of approximately $88 million and our share repurchase activity which totaled $33 million in the current quarter. We have $208 million remaining in the share repurchase program authorized through December 31, 2014. We ended the quarter with cash and marketable securities of over $2.8 billion.

As announced in February, the Board will recommend to the shareholders for approval at the annual meeting to be held on June 6, 2014 a cash dividend in the amount of $1.92 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 quarterly installments.

2014 Guidance:

While results in first quarter exceeded our expectations, it is historically the seasonally weakest quarter of the year and much of the year still lies in front of us. Due to these factors, we will update guidance following second quarter as has been our past practice.

Webcast Information/Forward-Looking Statements:

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

    When:   Wednesday, April 30, 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 800-274-0251

An archive of the live webcast will be available until June 25, 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, Tri-Tronics, Forerunner and Edge are registered trademarks and G3X, fēnix, VIRB and vivofit 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
March 29, March 30,
  2014     2013  
Net sales $ 583,221 $ 531,957
 
Cost of goods sold   252,387     255,824  
 
Gross profit 330,834 276,133
 
Advertising expense 24,428 22,249
Selling, general and administrative expense 89,873 86,269
Research and development expense   96,164     87,689  
Total operating expense   210,465     196,207  
 
Operating income 120,369 79,926
 
Other income (expense):
Interest income 9,768 8,898
Foreign currency gains (losses) 12,814 (8,348 )
Other   (484 )   1,158  
Total other income (expense)   22,098     1,708  
 
Income before income taxes 142,467 81,634
 
Income tax provision (benefit):   23,649     (7,032 )
 
Net income $ 118,818   $ 88,666  
 
Net income per share:
Basic $ 0.61 $ 0.45
Diluted $ 0.61 $ 0.45
 
Weighted average common
shares outstanding:
Basic 195,090 195,630
Diluted 195,860 196,457
 
       
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except share information)
       
(Unaudited)
March 29, December 28,
  2014         2013  
Assets
Current assets:
Cash and cash equivalents $ 1,136,691 $ 1,179,149
Marketable securities 163,660 149,862
Accounts receivable, net 427,457 564,586
Inventories, net 442,025 382,226
Deferred income taxes 67,792 69,823
Deferred costs 52,009 57,368
Loan receivable 42,862 137,379
Prepaid expenses and other current assets   54,999     55,243  
Total current assets 2,387,495 2,595,636
 
Property and equipment, net 417,164 414,848
 
Marketable securities 1,571,166 1,502,106
Restricted cash 246 249
Noncurrent deferred income tax 87,524 88,324
Noncurrent deferred costs 38,384 41,157
Other intangible assets, net 216,260 219,494
Other assets   20,675     17,789  
Total assets $ 4,738,914   $ 4,879,603  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 124,241 $ 146,582
Salaries and benefits payable 58,166 59,794
Accrued warranty costs 25,016 26,767
Accrued sales program costs 31,245 50,903
Deferred revenue 238,285 256,908
Accrued royalty costs 7,901 64,538
Accrued advertising expense 12,643 19,448
Other accrued expenses 73,911 65,657
Deferred income taxes 1,974 989
Income taxes payable 36,009 38,043
Dividend payable   87,717     175,675  
Total current liabilities 697,108 905,304
 
Deferred income taxes 1,750 1,758
Non-current income taxes 141,723 140,933
Non-current deferred revenue 144,664 171,012
Other liabilities 1,299 890
 
Stockholders' equity:
Shares, CHF 10 par value, 208,077,418 shares authorized and issued;
194,773,186 shares outstanding at March 29, 2014
and 195,150,102 shares outstanding at December 28, 2013 1,797,435 1,797,435
Additional paid-in capital 80,837 79,263
Treasury stock (145,609 ) (120,620 )
Retained earnings 1,984,405 1,865,587
Accumulated other comprehensive income   35,302     38,041  
Total stockholders' equity   3,752,370     3,659,706  
Total liabilities and stockholders' equity $ 4,738,914   $ 4,879,603  
 
       
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
  13-Weeks Ended
March 29, March 30,
  2014     2013  
Operating Activities:
Net income $ 118,818 $ 88,666
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 11,672 12,619
Amortization 6,740 8,271
(Gain) loss on sale of property and equipment (617 ) 36
Provision for doubtful accounts (189 ) 727
Deferred income taxes 5,942 1,493
Unrealized foreign currency gains (15,334 ) (495 )
Provision for obsolete and slow moving inventories 3,384 6,033
Stock compensation expense 6,325 5,438
Realized loss (gain) on marketable securities 1,544 (1,073 )
Changes in operating assets and liabilities:
Accounts receivable 137,198 152,307
Inventories (64,083 ) (13,608 )
Other current and non-current assets (1,591 ) (49,321 )
Accounts payable (20,411 ) (18,377 )
Other current and non-current liabilities (80,011 ) (100,784 )
Deferred revenue (45,290 ) (23,329 )
Deferred cost 8,129 4,813
Income taxes payable   (1,053 )   (14,053 )
Net cash provided by operating activities 71,173 59,363
 
Investing activities:
Purchases of property and equipment (15,537 ) (11,616 )
Proceeds from sale of property and equipment 609 12
Purchase of intangible assets (1,111 ) (347 )
Purchase of marketable securities (298,695 ) (258,604 )
Redemption of marketable securities 223,786 270,925
Proceeds from repayment (advances) on loan receivable 94,507 (18,324 )
Change in restricted cash   3     (1 )
Net cash provided by (used in) investing activities 3,562 (17,955 )
 
Financing activities:
Dividends paid (87,853 ) (175,956 )
Purchase of treasury stock under share repurchase plan (32,986 ) -
Purchase of treasury stock related to equity awards (58 ) (62 )
Proceeds from issuance of treasury stock related to equity awards 1,107 1,474
Tax benefit from issuance of equity awards   2,199     258  
Net cash used in financing activities (117,591 ) (174,286 )
 
Effect of exchange rate changes on cash and cash equivalents 398 (4,862 )
   
Net decrease in cash and cash equivalents (42,458 ) (137,740 )
Cash and cash equivalents at beginning of period   1,179,149     1,231,180  
Cash and cash equivalents at end of period $ 1,136,691   $ 1,093,440  
 
 
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 Mar 29, 2014
 
Net sales $83,985 $100,288 $60,002 $242,952 $95,994 $583,221
Gross profit $50,910 $64,085 $31,053 $113,791 $70,995 $330,834
Operating income $23,683 $33,512 $3,810 $30,564 $28,800 $120,369
 
13-Weeks Ended Mar 30, 2013
 
Net sales $76,165 $72,437 $50,296 $252,589 $80,470 $531,957
Gross profit $44,475 $44,968 $23,347 $107,120 $56,223 $276,133
Operating income/(loss) $21,588 $19,892 ($2,440) $20,032 $20,854 $79,926
 
   
Garmin Ltd. And Subsidiaries
Revenue by Geography (Unaudited)
       
13-Weeks Ended
Mar 29, Mar 30, Yr over Yr
2014 2013 Change
Net sales $583,221 $531,957 10%
Americas 304,808 285,813 7%
EMEA 220,603 190,775 16%
APAC 57,810 55,369 4%

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 due to completion of tax audits and/or expiration of statutes 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 reserve releases 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 release of other uncertain tax position reserves, amounting to approximately $6 million in the first quarter of 2014, has 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 due to completion of tax audits and/or expiration of statutes 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
Mar 29, Mar 30,
  2014     2013  
 
Net Income (GAAP) $ 118,818 $ 88,666
Foreign currency (gain) / loss, net of tax effects ($10,687 ) $ 7,377
Income tax benefit due to completion of tax audits
and/or expiration of statutes   -     ($16,536 )
Net income (Pro Forma) $ 108,131   $ 79,507  
 
Net income per share (GAAP):
Basic $ 0.61 $ 0.45
Diluted $ 0.61 $ 0.45
 
Net income per share (Pro Forma):
Basic $ 0.55 $ 0.41
Diluted $ 0.55 $ 0.40
 
Weighted average common shares outstanding:
Basic 195,090 195,630
Diluted 195,860 196,457
 

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
Mar 29, Mar 30,
  2014     2013  
 
Net cash provided by operating activities $ 71,173 $ 59,363
Less: purchases of property and equipment   ($15,537 )   ($11,616 )
Free Cash Flow $ 55,636   $ 47,747  
 

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