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Garmin reports record third quarter operating results; issues fiscal 2020 guidance

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Garmin Ltd. (Nasdaq: GRMN) today announced results for the third quarter ended September 26.

Highlights for third quarter 2020 include:

  • Total revenue of over $1.1 billion, a 19% year-over-year increase, led by robust growth in marine, fitness and outdoor

  • Gross margin and operating margin were 60.2% and 28.6%, respectively

  • Operating income of $317 million, increasing 21% over the prior year quarter

  • GAAP diluted EPS was $1.63 and pro forma diluted EPS(1) was $1.58, increasing 24% over the prior year quarter

  • Named Manufacturer of the Year by the National Marine Electronics Association for the sixth consecutive year

  • Since its launch in 2011, Garmin inReach® has provided remote communication and rescue facilitation in over 5,000 SOS incidents, demonstrating the crucial importance of satellite based two-way messaging wherever our customers need assistance

  • Began production shipments of the BMW MGU 2020 computing module, expanding our role as a tier-one supplier for BMW automobiles

  • Launched the Garmin Catalyst, an industry-first coaching tool to optimize motorsports driving performance

  • Garmin Autoland has achieved Federal Aviation Administration (FAA) certification in a total of three aircraft to-date with the latest being the Cirrus Vision Jet, the first jet aircraft to be certified with this game-changing safety technology

(in thousands, except per share data)

13-Weeks Ended

39-Weeks Ended

September 26,

September 28,

YoY

September 26,

September 28,

YoY

2020

2019

Change

2020

2019

Change

Net sales

$

1,109,194

$

934,383

19

%

$

2,835,168

$

2,655,273

7

%

Marine

165,437

107,694

54

%

486,269

393,070

24

%

Fitness

328,446

243,099

35

%

846,688

675,007

25

%

Outdoor

334,844

258,294

30

%

716,146

622,748

15

%

Auto

129,355

137,722

(6

)%

320,215

422,132

(24

)%

Aviation

151,112

187,574

(19

)%

465,850

542,316

(14

)%

Gross margin %

60.2

%

60.7

%

59.6

%

60.1

%

Operating income %

28.6

%

28.0

%

24.1

%

25.2

%

GAAP diluted EPS

$

1.63

$

1.19

37

%

$

3.44

$

3.10

11

%

Pro forma diluted EPS(1)

$

1.58

$

1.27

24

%

$

3.41

$

3.16

8

%

(1) See attached Non-GAAP Financial Information for discussion and reconciliation of non-GAAP financial measures, including pro forma diluted EPS

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

"Demand for active lifestyle products fueled strong revenue growth resulting in record revenue and profits for the quarter," said Cliff Pemble, President and CEO of Garmin. "Interest in our products remains high as we move into the important holiday selling season, and we are prepared with a strong lineup of products that offer the innovation and uniqueness that consumers want."

Marine:

Revenue from the marine segment grew 54% in the third quarter across multiple categories led by chartplotters. Gross margin and operating margin were 61% and 31%, respectively, resulting in 152% operating income growth. For the sixth consecutive year, Garmin was recognized as the Manufacturer of the Year by the National Marine Electronics Association (NMEA) and was also awarded four Product of Excellence awards. We launched the new OnDeck system, Garmin’s first remote connectivity solution for boaters to track, monitor, and remotely control switches on their vessel from virtually anywhere. We also refreshed our Fantom solid-state marine radar offering industry leading power in the solid-state RADAR market.

Fitness:

Revenue from the fitness segment grew 35% in the third quarter driven by strong demand for our advanced wearables and cycling products. Gross margin and operating margin were 54% and 27%, respectively, resulting in 75% operating income growth. We launched the new Forerunner® 745, adding daily suggested workouts helping competitors reach their goals, and the Garmin Clipboard app that offers an integrated solution for coaches to manage team training and performance. We also launched the Venu® Sq, an entry-level smart watch with GPS capability that combines daily style with industry-leading health monitoring.

Outdoor:

Revenue from the outdoor segment grew 30% in the third quarter across all categories led by strong demand for our adventure watches. Gross margin and operating margin were 67% and 44%, respectively, resulting in 40% operating income growth. We recently refreshed the popular Montana® series, combining the flexibility of on or off-road navigation with global messaging and SOS alerts via inReach® satellite technology.

Auto:

Revenue from the auto segment declined 6% during the third quarter as declines in personal navigation devices were partially offset by growth in specialty categories and new OEM programs. Gross and operating margins were 45% and 3%, respectively. We launched Garmin Catalyst, a new product category and an industry-first real-time coaching tool to help drivers achieve their full potential on the track. We began production shipments of the BMW MGU 2020 computing module expanding our role as a tier-one supplier for BMW automobiles. In addition, we began shipments of a complete infotainment solution for the Daimler Vito vehicle.

Aviation:

Revenue from the aviation segment declined 19% in the third quarter due to fewer shipments to OEM customers and reduced contributions from ADS-B products. Gross margin and operating margin were 71% and 19%, respectively. During the quarter, Autoland achieved FAA certification on the Cirrus Vision Jet, becoming the first jet aircraft to incorporate Autoland technology. This latest certification brings the Autoland equipped aircraft to three models including the previously certified Piper M600 and Daher TBM 940.

Additional Financial Information:

Total operating expenses in the third quarter were $351 million, a 15% increase over the prior year. Research and development increased by 18%, primarily due to engineering personnel costs. Selling, general and administrative expenses increased 14%, driven primarily by information technology costs and personnel related expenses. Advertising increased 4%, driven primarily by higher spend in the outdoor segment.

The effective tax rate in the third quarter of 2020 was 6.9% compared to 11.6% in the prior year quarter. The decrease in the effective tax rate is primarily due to the migration of intellectual property ownership from Switzerland to the United States.

In the third quarter of 2020, we generated approximately $236 million of free cash flow(1), and paid a quarterly dividend of approximately $117 million. We ended the quarter with cash and marketable securities of approximately $2.7 billion.

(1) See attached Non-GAAP Financial Information for discussion and reconciliation of non-GAAP financial measures, including free cash flow.

2020 Guidance (2):

We expect full year 2020 revenue of approximately $4.0 billion with growth in the marine, fitness, and outdoor segments partially offset by declines in the auto and aviation segments. We expect our full year pro forma EPS to be approximately $4.70 based upon gross margin of approximately 59.0%, operating margin of approximately 24.0% and a full year pro forma effective tax rate of approximately 10.0%.

2020 Guidance

Segment

2020 Revenue
Growth Estimates

Revenue

~$4.0B

Marine

~25%

Gross Margin

~59.0%

Fitness

~20%

Operating Margin

~24.0%

Outdoor

~15%

Tax Rate

~10.0%

Aviation

~(17%)

EPS

~$4.70

Auto

~(20%)

(2) See attached discussion on Forward-looking Financial Measures

Webcast Information/Forward-Looking Statements:

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

When:

Wednesday, October 28, 2020 at 10:30 a.m. Eastern

Where:

https://www.garmin.com/en-US/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, 2021 on the Garmin website at www.garmin.com. To access the replay, click on the Investors 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 "anticipates," "would," "may," "expects," "estimates," "plans," "intends," "projects," and other words or phrases with similar meanings. Any statements regarding the Company’s expected fiscal 2020 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, potential future acquisitions, currency movements, expenses, pricing, new products to be introduced, statements relating to possible future dividends, statements related to the ongoing impact of the COVID-19 pandemic, 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 both the Annual Report on Form 10-K for the year ended December 28, 2019 and the Quarterly Report on Form 10-Q for the quarter ended September 26, 2020 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2019 Form 10-K and the Q3 2020 Form 10-Q can be downloaded from https://www.garmin.com/en-US/investors/sec/. All information provided in this release and in the attachments is as of October 28, 2020. Undue reliance should not be placed on the forward-looking statements in this press release, which are based on information available to us on the date hereof. We undertake no duty to update this information unless required by law.

This release and the attachments contain non-GAAP financial measures. A reconciliation to the nearest GAAP measure and a discussion of the Company's use of these measures are included in the attachments.

Garmin, the Garmin logo and the Garmin delta, Forerunner, Venu, inReach and Montana are trademarks of Garmin Ltd. or its subsidiaries and are registered in one or more countries, including the U.S. Garmin Catalyst, Fantom, Garmin OnDeck, and Panoptix, 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

September 26,

September 28,

September 26,

September 28,

2020

2019

2020

2019

Net sales

$

1,109,194

$

934,383

$

2,835,168

$

2,655,273

Cost of goods sold

441,211

366,925

1,144,816

1,060,752

Gross profit

667,983

567,458

1,690,352

1,594,521

Advertising expense

33,866

32,668

90,031

101,808

Selling, general and administrative expense

142,134

124,769

411,335

380,289

Research and development expense

174,882

148,561

506,013

443,361

Total operating expense

350,882

305,998

1,007,379

925,458

Operating income

317,101

261,460

682,973

669,063

Other income (expense):

Interest income

7,777

12,309

30,258

39,748

Foreign currency gains (losses)

10,113

(16,296

)

(9,802

)

(12,568

)

Other income (expense)

1,726

294

8,515

3,567

Total other income (expense)

19,616

(3,693

)

28,971

30,747

Income before income taxes

336,717

257,767

711,944

699,810

Income tax provision

23,300

29,901

53,168

108,115

Net income

$

313,417

$

227,866

$

658,776

$

591,695

Net income per share:

Basic

$

1.64

$

1.20

$

3.45

$

3.12

Diluted

$

1.63

$

1.19

$

3.44

$

3.10

Weighted average common shares outstanding:

Basic

191,234

190,102

191,021

189,853

Diluted

191,998

190,962

191,760

190,790

Garmin Ltd. And Subsidiaries

Condensed Consolidated Balance Sheets (Unaudited)

(In thousands, except per share information)

September 26
2020

December 28
2019

Assets

Current assets:

Cash and cash equivalents

$

1,223,516

$

1,027,567

Marketable securities

430,164

376,463

Accounts receivable, net

658,000

706,763

Inventories

821,377

752,908

Deferred costs

21,067

25,105

Prepaid expenses and other current assets

187,746

169,044

Total current assets

3,341,870

3,057,850

Property and equipment, net

813,561

728,921

Operating lease right-of-use assets

74,949

63,589

Restricted cash

293

71

Marketable securities

1,058,103

1,205,475

Deferred income taxes

247,502

268,518

Noncurrent deferred costs

17,676

23,493

Intangible assets, net

818,781

659,629

Other assets

177,934

159,253

Total assets

$

6,550,669

$

6,166,799

Liabilities and Stockholders’ Equity

Current liabilities:

Accounts payable

$

235,467

$

240,831

Salaries and benefits payable

137,859

128,426

Accrued warranty costs

40,002

39,758

Accrued sales program costs

76,255

112,578

Deferred revenue

88,042

94,562

Accrued royalty costs

15,389

15,401

Accrued advertising expense

25,905

35,142

Other accrued expenses

105,731

95,060

Income taxes payable

48,342

56,913

Dividend payable

349,964

217,262

Total current liabilities

1,122,956

1,035,933

Deferred income taxes

124,746

114,754

Noncurrent income taxes

75,186

105,771

Noncurrent deferred revenue

52,715

67,329

Noncurrent operating lease liabilities

58,416

49,238

Other liabilities

12,309

278

Stockholders’ equity:

Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 191,237
shares outstanding at September 26, 2020 and 190,686 shares outstanding
at December 28, 2019

17,979

17,979

Additional paid-in capital

1,872,519

1,835,622

Treasury stock

(326,294

)

(345,040

)

Retained earnings

3,421,159

3,229,061

Accumulated other comprehensive income

118,978

55,874

Total stockholders’ equity

5,104,341

4,793,496

Total liabilities and stockholders’ equity

$

6,550,669

$

6,166,799

Garmin Ltd. And Subsidiaries

Condensed Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

39-Weeks Ended

September 26,
2020

September 28,
2019

Operating Activities:

Net income

$

658,776

$

...

591,695

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

57,141

52,503

Amortization

32,969

25,112

Gain on sale of property and equipment

(1,815

)

(5

)

Unrealized foreign currency losses

4,384

14,653

Deferred income taxes

14,353

18,012

Stock compensation expense

53,515

47,553

Realized gain on marketable securities

(1,316

)

(213

)

Changes in operating assets and liabilities, net of acquisitions:

Accounts receivable, net of allowance for doubtful accounts

59,474

15,244

Inventories

(56,063

)

(178,121

)

Other current and non-current assets

(27,019

)

(86,538

)

Accounts payable

(11,939

)

27,523

Other current and non-current liabilities

(18,299

)

(54,401

)

Deferred revenue

(21,148

)

(7,750

)

Deferred costs

9,855

6,326

Income taxes payable

(53,419

)

(7,423

)

Net cash provided by operating activities

699,449

464,170

Investing activities:

Purchases of property and equipment

(137,072

)

(91,469

)

Proceeds from sale of property and equipment

1,965

370

Purchase of intangible assets

(1,643

)

(1,862

)

Purchase of marketable securities

(702,487

)

(333,320

)

Redemption of marketable securities

808,554

333,783

Acquisitions, net of cash acquired

(148,648

)

(275,310

)

Net cash used in investing activities

(179,331

)

(367,808

)

Financing activities:

Dividends

(333,975

)

(308,905

)

Proceeds from issuance of treasury stock related to equity awards

15,202

12,982

Purchase of treasury stock related to equity awards

(13,074

)

(12,972

)

Net cash used in financing activities

(331,847

)

(308,895

)

Effect of exchange rate changes on cash and cash equivalents

7,900

(11,834

)

Net increase (decrease) in cash, cash equivalents, and restricted cash

196,171

(224,367

)

Cash, cash equivalents, and restricted cash at beginning of period

1,027,638

1,201,805

Cash, cash equivalents, and restricted cash at end of period

$

1,223,809

$

977,438

Garmin Ltd. And Subsidiaries

Net Sales, Gross Profit and Operating Income by Segment (Unaudited)

(In thousands)

Reportable Segments

Marine

Fitness

Outdoor

Auto

Aviation

Total

13-Weeks Ended September 26, 2020

Net sales

$

165,437

$

328,446

$

334,844

$

129,355

$

151,112

$

1,109,194

Gross profit

100,423

177,794

223,704

58,135

107,927

667,983

Operating income

50,482

87,083

147,477

3,462

28,597

317,101

13-Weeks Ended September 28, 2019

Net sales

$

107,694

$

243,099

$

258,294

$

137,722

$

187,574

$

934,383

Gross profit

64,275

126,835

170,846

65,814

139,688

567,458

Operating income

20,008

49,831

105,051

20,857

65,713

261,460

39-Weeks Ended September 26, 2020

Net sales

$

486,269

$

846,688

$

716,146

$

320,215

$

465,850

$

2,835,168

Gross profit

288,103

446,936

469,150

147,393

338,770

1,690,352

Operating income

134,195

190,075

262,057

(6,837

)

103,483

682,973

39-Weeks Ended September 28, 2019

Net sales

$

393,070

$

675,007

$

622,748

$

422,132

$

542,316

$

2,655,273

Gross profit

234,014

352,805

403,842

198,012

405,848

1,594,521

Operating income

88,212

118,369

218,340

53,978

190,164

669,063

Garmin Ltd. And Subsidiaries

Net Sales by Geography (Unaudited)

(In thousands)

13-Weeks Ended

39-Weeks Ended

September 26,

September 28,

YoY

September 26,

September 28,

YoY

2020

2019

Change

2020

2019

Change

Net sales

$

1,109,194

$

934,383

19

%

$

2,835,168

$

2,655,273

7

%

Americas

521,869

439,113

19

%

1,372,360

1,289,409

6

%

EMEA

407,859

344,010

19

%

1,042,928

942,625

11

%

APAC

179,466

151,260

19

%

419,880

423,239

(1

)%

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, 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, limiting the usefulness of the measures for comparison with 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, as described in more detail by category below.

The tables below provide reconciliations between the GAAP and non-GAAP measures.

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, management believes disclosure of the effective tax rate and income tax provision before the effect of certain discrete tax items are important measures to permit investors' consistent comparison between periods. In the first 39 weeks of 2019, there were no such discrete tax items identified.

Garmin Ltd. And Subsidiaries

Pro Forma Effective Tax Rate

(In thousands, except effective tax rate (ETR) information)

13-Weeks Ended

39-Weeks Ended

September 26,

September 26,

2020

2020

$

ETR(1)

$

ETR(1)

U.S GAAP income tax provision

$

23,300

6.9

%

$

53,168

7.5

%

Pro forma discrete tax item:

Uncertain Tax Reserve Release(2)

14,308

Pro forma income tax provision

$

23,300

6.9

%

$

67,476

9.5

%

(1) 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.

(2) In second quarter 2020, the Company recognized a $14.3 million income tax benefit due to the release of uncertain tax position reserves associated with the 2014 intercompany restructuring, which was a pro forma adjustment in 2014. The second quarter 2020 impact of the reserve release is not reflective of income tax expense incurred as a result of current period earnings and therefore affects period-to-period comparability.

The net release of other uncertain tax position reserves, amounting to approximately $22.9 million and $23.3 million in the 39 weeks ended September 26, 2020 and September 28, 2019, respectively, have not been identified as pro forma adjustments as such items tend to be more recurring in nature.

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.

Garmin Ltd. And Subsidiaries

Pro Forma Net Income (Earnings) Per Share

(In thousands, except per share information)

13-Weeks Ended

39-Weeks Ended

September 26,

September 28,

September 26,

September 28,

2020

2019

2020

2019

GAAP net income

$

313,417

$

227,866

$

658,776

$

591,695

Foreign currency gains / losses(1)

(10,113

)

16,296

9,802

12,568

Tax effect of foreign currency gains / losses(2)

700

(1,890

)

(929

)

(1,942

)

Pro forma discrete tax item(3)

(14,308

)

Pro forma net income

$

304,004

$

242,272

$

653,341

$

602,321

GAAP net income per share:

Basic

$

1.64

$

1.20

$

3.45

$

3.12

Diluted

$

1.63

$

1.19

$

3.44

$

3.10

Pro forma net income per share:

Basic

$

1.59

$

1.27

$

3.42

$

3.17

Diluted

$

1.58

$

1.27

$

3.41

$

3.16

Weighted average common shares outstanding:

Basic

191,234

190,102

191,021

189,853

Diluted

191,998

190,962

191,760

190,790

(1) Foreign currency gains and losses for the Company are driven by movements of a number of currencies 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 a given legal entity. However, there is minimal cash impact from such foreign currency gains and losses.

(2) The tax effect of foreign currency gains and losses was calculated using the pro forma effective tax rate of 6.9% and 9.5% for the 13-weeks and 39-weeks ended September 26, 2020, respectively, and an effective tax rate of 11.6% and 15.4% for the 13-weeks and 39-weeks ended September 28, 2019, respectively.

(3) The discrete tax item is discussed in the pro forma effective tax rate section above.

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 flows less capital expenditures for property and equipment. Management believes that excluding purchases of property and equipment provides a better understanding of the underlying trends in the Company’s operating performance and allows more accurate comparisons of the Company’s operating results to historical performance. This metric may also be useful to investors, but should not be considered in isolation as it is not a measure of cash flow available for discretionary expenditures. The most comparable GAAP measure is net cash provided by operating activities.

Garmin Ltd. And Subsidiaries

Free Cash Flow

(In thousands)

13-Weeks Ended

39-Weeks Ended

September 26,

September 28,

September 26,

September 28,

2020

2019

2020

2019

Net cash provided by operating activities

$

274,339

$

188,952

$

699,449

$

464,170

Less: purchases of property and equipment

(38,802

)

(30,974

)

(137,072

)

(91,469

)

Free Cash Flow

$

235,537

$

157,978

$

562,377

$

372,701

Forward-looking Financial Measures

The forward-looking financial measures in our 2020 guidance provided above do not consider the potential future net effect of foreign currency exchange gains and losses, certain discrete tax items and any other impacts that may be identified as pro forma adjustments in calculating the non-GAAP measures described above.

The estimated impact of 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 on diluted net income per share of foreign currency gains and losses, net of tax effects, was $0.05 per share for the 39-weeks ended September 26, 2020.

At this time, management is unable to determine whether or not additional significant discrete tax items will occur in fiscal 2020 or anticipate the impact of any other events that may be considered in the calculation of non-GAAP financial measures.

Category: Corporate, Earnings

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investor.relations@garmin.com

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