Garmin reports fiscal year 2018 revenue and strong operating income growth; proposes dividend increase

SCHAFFHAUSEN, Switzerland–(BUSINESS WIRE)–Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the fourth
quarter and fiscal year ended December 29, 2018.

Highlights for the fourth quarter 2018 include:

  • Total revenue of $932 million, a 4% increase, with aviation, marine,
    outdoor and fitness collectively increasing 13% over the prior year
    quarter
  • Gross margin improved to 58.9% compared to 56.1% in the prior year
    quarter
  • Operating margin improved to 23.9% compared to 20.4% in the prior year
    quarter
  • Operating income of $223 million, representing 21% growth over the
    prior year
  • GAAP EPS was $1.00 and pro forma EPS(1) was $1.02 for
    fourth quarter 2018, representing growth of 26% over the prior year
  • Recently signed an agreement to acquire Tacx, a leading provider of
    indoor bike trainers
  • Launched our first marine chartplotters with a combined Garmin and
    Navionics® chart database, offering industry leading breadth and depth
    of coverage

Highlights for the fiscal year 2018 include:

  • Total revenue of $3,347 million, a 7% increase, with aviation, marine,
    outdoor and fitness collectively increasing 16% over the prior year
  • Gross margin improved to 59.1% compared to 57.6% in the prior year
  • Operating margin improved to 23.3% compared to 21.9% in the prior year
  • Operating income of $778 million, representing 14% growth over the
    prior year
  • GAAP EPS was $3.66 and pro forma EPS(1) was $3.69,
    representing 22% growth over the prior year
  • Launched new categories of innovative wearables including Instinct™, a
    GPS smartwatch that expands the market for adventure watches, and
    Descent™, a dive computer in a watch style design for recreational,
    technical and free divers
  • Expanded our portfolio of music compatible devices and integrated
    seven music providers into our Connect IQ™ app store including
    Spotify, Deezer and KKBOX
  • Shipped nearly 15 million units and over 205 million since inception,
    including over one million certified aviation products.
  • Completed the strategic acquisitions of FltPlan, a leading electronic
    flight planning and service provider, and Trigentic, a privately-held
    worldwide provider of marine electronic digital switching
  • Opened our new aviation manufacturing facility in Olathe, Kansas, more
    than doubling our North American manufacturing capacity
         
(in thousands, 13-Weeks Ended     52-Weeks Ended    
except per share data) December 29,   December 30, Yr over Yr December 29,   December 30, Yr over Yr
  2018     2017     Change   2018     2017     Change
Net sales $ 932,108 $ 897,319 4 % $ 3,347,444 $ 3,121,560 7 %
Aviation 158,314 129,800 22 % 603,459 501,359 20 %
Marine 94,652 83,699 13 % 441,560 374,001 18 %
Outdoor 254,568 203,278 25 % 809,883 698,867 16 %
Fitness 277,014 276,195 0 % 858,329 762,194 13 %
Auto 147,560 204,347 -28 % 634,213 785,139 -19 %
 
Gross margin % 58.9 % 56.1 % 59.1 % 57.6 %
 
Operating income % 23.9 % 20.4 % 23.3 % 21.9 %
 
GAAP diluted EPS $ 1.00 $ 0.75 33 % $ 3.66 $ 3.76 -3 %
Pro forma diluted EPS (1) $ 1.02 $ 0.81 26 % $ 3.69 $ 3.02 22 %
 
(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:

“2018 was another remarkable year of revenue and operating income growth
driven by strong performance in our aviation, marine, outdoor and
fitness segments,” said Cliff Pemble, president and chief executive
officer of Garmin Ltd. “Entering 2019, we see many opportunities ahead
and believe that we are well positioned to seize these opportunities
with a strong lineup of products across all of our segments.”

Aviation:

Revenue from the aviation segment grew 22% in the quarter with
contributions from both the aftermarket and OEM categories. Gross and
operating margins were 73% and 33%, respectively, resulting in 27%
operating income growth. Aftermarket systems and ADS-B solutions
contributed to our positive results as we move toward the ADS-B mandate
deadline. We were honored to receive the supplier of the year award from
Airbus Helicopters, and recently ranked #1 in avionics support for the 15th
consecutive year by both Professional Pilot Magazine and Aviation
International News.

Marine:

Revenue from the marine segment grew 13% in the quarter driven by our
new lineup of chartplotters, advanced sonars, and cartography offerings
that combine the best of both Garmin and Navionics content. Gross and
operating margins improved to 58% and 9%, respectively. We recently
began shipping the 2019 lineup of marine electronics including the
GPSMAP® 8600 series, our flagship product line with combined Garmin and
Navionics chart content.

Outdoor:

Revenue from the outdoor segment grew 25% in the quarter with
significant contributions from adventure watches. Gross and operating
margins improved to 67% and 38%, respectively, resulting in 31%
operating income growth. During the quarter, we launched Instinct, our
newest line of adventure watch, and the GPSMAP 66 series of outdoor
handhelds.

Fitness:

Revenue from the fitness segment was flat in the quarter compared to a
strong prior year quarter. Gross and operating margins increased to 52%
and 21%, resulting in 2% operating income growth. We recently introduced
the vívoactive® 3 Music with 4G LTE, bringing connected safety features
to the wrist. The pending acquisition of Tacx is an exciting opportunity
to expand into the year-round indoor cycling and training market.

Auto:

The auto segment recorded revenue decline of 28% in the quarter,
primarily due to the ongoing PND market contraction and lower
year-over-year OEM sales. Gross margin improved to 43% and operating
margin declined to 5%. At the recent Consumer Electronics Show, we
announced our new line of Drive™ navigators with simplified, road
trip-ready features and our updated OEM scalable infotainment platform.

Additional Financial Information:

Total operating expenses in the quarter were $326 million, a 2% increase
from the prior year. Research and development increased 10%, primarily
due to engineering personnel costs. Selling, general and administrative
expenses decreased 2%, due primarily to reduced litigation related
costs. Advertising decreased 6%, primarily due to lower media spend as
we strategically focused our promotions.

The effective tax rate in the fourth quarter of 2018 was 18.0% compared
to the pro forma effective tax rate of 20.5% in the prior year quarter.
The decrease in the current quarter effective tax rate is primarily due
to the benefits from U.S. tax reform.

In the fourth quarter of 2018, we generated approximately $185 million
of free cash flow (see attached table for reconciliation of this
non-GAAP measure). We ended the quarter with cash and marketable
securities of approximately $2.7 billion.

2019 Guidance (2):

We currently expect 2019 revenue of approximately $3.5 billion as growth
in fitness, aviation, outdoor and marine is partially offset by declines
in the auto segment. We currently expect our full year EPS will be
approximately $3.70 based upon improved gross margin of approximately
59.5%, operating margin of approximately 22.7% and a full year effective
tax rate of approximately 16.5%.

     

 

        Revenue
Growth
2019 Guidance Segment   Estimates
Revenue ~$3.5B Fitness(3) ~13%
Gross Margin ~59.5% Aviation ~10%
Operating Margin ~22.7% Outdoor ~10%
Tax Rate ~16.5% Marine ~10%
EPS ~$3.70 Auto ~(18%)
 
      (2) See attached discussion on Forward-looking Financial Measures
(3) Fitness revenue growth estimate assumes the acquisition of Tacx
will close within the second quarter of 2019
 

Dividend Recommendation:

The board of directors intends to recommend to the shareholders for
approval at the annual meeting to be held on June 7, 2019, a cash
dividend in the amount of $2.28 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 determined by the Board. The Board currently anticipates the
scheduling of the dividend in four installments as follows:

          Dividend Date     Record Date     $s per share
June 28, 2019 June 17, 2019 $0.57
September 30, 2019 September 16, 2019 $0.57
December 31, 2019 December 16, 2019 $0.57
March 31, 2020 March 16, 2020 $0.57
 

In addition, the board of directors has established March 29, 2019 as
the payment date and March 15, 2019 as the record date for the final
dividend installment of $0.53 per share, per the prior approval at the
2018 annual shareholders’ meeting. The first, second and third payments
of $0.53 per share were made on June 29, 2018, September 28, 2018, and
December 31, 2018, respectively.

Revenue Standard Adoption

We adopted the new revenue standard in the first quarter of 2018. The
prior periods presented have been restated to reflect adoption of this
new standard.

Webcast Information/Forward-Looking Statements:

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

      When:     Wednesday, February 20, 2019 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 February 27, 2020
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, potential future acquisitions, currency
movements, expenses, pricing, new products to be introduced in 2019,
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 29, 2018 filed by Garmin with the
Securities and Exchange Commission (Commission file number 0-31983). A
copy of Garmin’s 2018 Form 10-K can be downloaded from
https://www.garmin.com/en-US/company/investors/sec/form-10-K/.

Non-GAAP Financial Measures

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, the Garmin delta, Navionics, GPSMAP and
vívoactive, are trademarks of Garmin Ltd. or its subsidiaries and are
registered in one or more countries, including the U.S.; Descent, Drive
and Instinct 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   52-Weeks Ended
December 29, December 30, December 29, December 30,
  2018     2017     2018       2017  
Net sales $ 932,108 $ 897,319 $ 3,347,444 $ 3,121,560
 
Cost of goods sold   382,942     393,837     1,367,725     1,323,619  
 
Gross profit 549,166 503,482 1,979,719 1,797,941
 
Advertising expense 55,394 58,711 155,394 164,693
Selling, general and administrative expense 125,942 128,879 478,177 437,977
Research and development expense   145,157     132,552     567,805     511,634  
Total operating expense   326,493     320,142     1,201,376     1,114,304  
 
Operating income 222,673 183,340 778,343 683,637
 
Other income (expense):
Interest income 14,837 9,994 47,147 36,925
Foreign currency losses (4,211 ) (8,772 ) (7,616 ) (22,579 )
Other (expense) income   (1,426 )   (107 )   5,373     (912 )
Total other income (expense)   9,200     1,115     44,904     13,434  
 
Income before income taxes 231,873 184,455 823,247 697,071
 
Income tax provision (benefit)   41,723     41,905     129,167     (11,936 )
 
Net income $ 190,150   $ 142,550   $ 694,080   $ 709,007  
 
Net income per share:
Basic $ 1.01 $ 0.76 $ 3.68 $ 3.77
Diluted $ 1.00 $ 0.75 $ 3.66 $ 3.76
 

Weighted average common shares outstanding:

Basic 188,878 187,607 188,635 187,828
Diluted 190,177 188,915 189,734 188,732
 
       
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share information)
       
December 29, December 30,
  2018     2017  
Assets
Current assets:
Cash and cash equivalents $ 1,201,732 $ 891,488
Marketable securities 182,989 161,687
Accounts receivable, net 569,833 590,882
Inventories 561,840 517,644
Deferred costs 28,462 30,525
Prepaid expenses and other current assets   120,512     153,912  
Total current assets 2,665,368 2,346,138
 
Property and equipment, net 663,527 595,684
 
Restricted cash 73 271
Marketable securities 1,330,123 1,260,033
Deferred income taxes 176,959 195,981
Noncurrent deferred costs 29,473 33,029
Intangible assets, net 417,080 409,801
Other assets   100,255     107,352  
Total assets $ 5,382,858   $ 4,948,289  
 
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 204,985 $ 169,640
Salaries and benefits payable 113,087 102,802
Accrued warranty costs 38,276 36,827
Accrued sales program costs 90,388 93,250
Deferred revenue 96,372 103,140
Accrued royalty costs 24,646 32,204
Accrued advertising expense 31,657 30,987
Other accrued expenses 69,777 93,652
Income taxes payable 51,642 33,638
Dividend payable   200,483     95,975  
Total current liabilities 921,313 792,115
 
Deferred income taxes 92,944 76,612
Noncurrent income taxes 127,211 138,295
Noncurrent deferred revenue 76,566 87,060
Other liabilities 1,850 1,788
 
Stockholders’ equity:

Shares, CHF 0.10 par value, 198,077 shares authorized and issued;
189,461 shares outstanding at December 29, 2018 and 188,189 shares
outstanding at December 30, 2017

17,979 17,979
Additional paid-in capital 1,823,638 1,828,386
Treasury stock (397,692 ) (468,818 )
Retained earnings 2,710,619 2,418,444
Accumulated other comprehensive income   8,430     56,428  
Total stockholders’ equity   4,162,974     3,852,419  
Total liabilities and stockholders’ equity $ 5,382,858   $ 4,948,289  
 
     
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
 
52-Weeks Ended
December 29, December 30,
  2018     2017  
Operating activities:
Net income $ 694,080 $ 709,007

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

Depreciation

64,798 59,895
Amortization 31,396 26,357
Gain on sale or disposal of property and equipment (479 ) (230 )
Provision for doubtful accounts 2,123 1,021
Provision for obsolete and slow moving inventories 24,579 31,071
Unrealized foreign currency loss 13,790 21,681
Deferred income taxes 38,978 (90,000 )
Stock compensation expense 56,391 44,735
Realized losses on marketable securities 827 991
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 5,167 (40,088 )
Inventories (82,316 ) (38,575 )
Other current and non-current assets 7,358 (21,608 )
Accounts payable 40,628 (17,240 )
Other current and non-current liabilities (1,323 ) 5,627
Deferred revenue (17,208 ) (20,754 )
Deferred costs 5,611 2,395
Income taxes payable   35,120     (13,443 )
Net cash provided by operating activities 919,520 660,842
 
Investing activities:
Purchases of property and equipment (155,755 ) (139,696 )
Proceeds from sale of property and equipment 1,600 361
Purchase of intangible assets (4,600 ) (12,232 )
Purchase of marketable securities (403,181 ) (587,656 )
Redemption of marketable securities 283,603 635,311
Acquisitions, net of cash acquired   (29,170 )   (90,471 )
Net cash used in investing activities (307,503 ) (194,383 )
 
Financing activities:
Dividends (296,148 ) (382,976 )
Proceeds from issuance of treasury stock related to equity awards 26,642 21,860
Purchase of treasury stock related to equity awards (16,655 ) (12,773 )
Purchase of treasury stock under share repurchase plan       (74,523 )
Net cash used in financing activities (286,161 ) (448,412 )
 
Effect of exchange rate changes on cash, cash equivalents, and
restricted cash
(15,810 ) 26,716
   
Net increase in cash, cash equivalents, and restricted cash 310,046 44,763
Cash, cash equivalents, and restricted cash at beginning of period   891,759     846,996  
Cash, cash equivalents, and restricted cash at end of period $ 1,201,805   $ 891,759  
 
           
Garmin Ltd. And Subsidiaries
Net Sales, Gross Profit and Operating Income by Segment
(Unaudited)
(in thousands)
 
Reportable Segments
 

Outdoor

Fitness

Marine

Auto

Aviation

Total

 
13-Weeks Ended December 29, 2018
 
Net sales $ 254,568 $ 277,014 $ 94,652 $ 147,560 $ 158,314 $ 932,108
Gross profit 169,425 145,291 54,779 63,405 116,266 549,166
Operating income 95,798 58,446 8,536 6,888 53,005 222,673
 
13-Weeks Ended December 30, 2017
 
Net sales $ 203,278 $ 276,195 $ 83,699 $ 204,347 $ 129,800 $ 897,319
Gross profit 128,952 146,622 45,902 84,954 97,052 503,482
Operating income 73,322 57,315 (10,533 ) 21,365 41,871 183,340
 
52-Weeks Ended December 29, 2018
 
Net sales $ 809,883 $ 858,329 $ 441,560 $ 634,213 $ 603,459 $ 3,347,444
Gross profit 528,254 471,764 258,756 270,793 450,152 1,979,719
Operating income 290,510 181,745 63,344 37,998 204,746 778,343
 
52-Weeks Ended December 30, 2017
 
Net sales $ 698,867 $ 762,194 $ 374,001 $ 785,139 $ 501,359 $ 3,121,560
Gross profit 448,410 422,636 212,592 342,698 371,605 1,797,941
Operating income 249,867 146,765 50,328 82,744 153,933 683,637
 
             
Garmin Ltd. And Subsidiaries
Net Sales by Geography (Unaudited)
(In thousands)
 
13-Weeks Ended 52-Weeks Ended
December 29, December 30, Yr over Yr December 29, December 30, Yr over Yr
  2018   2017   Change   2018   2017   Change
Net sales $ 932,108 $ 897,319 4 % $ 3,347,444 $ 3,121,560 7 %
Americas 443,386 431,948 3 % 1,596,716 1,504,194 6 %
EMEA 342,853 340,850 1 % 1,204,969 1,172,538 3 %
APAC 145,869 124,521 17 % 545,759 444,828 23 %
 
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 2018, 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 52-Weeks Ended
December 30, December 30,
2017 2017
 
  $     ETR(1)   $     ETR(1)
U.S. GAAP income tax provision (benefit) $ 41,905 22.7 % $ (11,936 ) (1.7 %)
Pro forma discrete tax items:
Switzerland corporate tax election(2) 11,279 180,034
Tax expense from share-based award expirations(3)   (15,345 )   (22,620 )
Total pro forma discrete tax items   (4,066 )       157,414      
Income tax provision (Pro Forma) $ 37,839     20.5 % $ 145,478     20.9 %
 

(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 first quarter 2017, a $169 million tax benefit was recognized
resulting from the revaluation of certain Switzerland deferred tax
assets. The revaluation is due to the Company’s election in February
2017 to align certain Switzerland corporate tax positions with
international tax initiatives. In the fourth quarter 2017, an
additional $11 million benefit was recognized as a result of this
Switzerland election. These impacts during the transitional period
following the election are not reflective of current income tax
expense incurred and therefore affect period-to-period comparability.

(3) Following adoption in fiscal 2017 of Accounting Standards
Update No. 2016-09, Compensation – Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting (“ASU
2016-09”), the Company may periodically incur tax expense
resulting from stock options and stock appreciation rights (SARs)
expiring unexercised. New grants of stock options and SARs no
longer comprise a significant component of the Company’s
compensation arrangements. As the tax expense from expired awards
is not related to current period earnings or compensation
activities, it has been identified as a pro forma adjustment.

 

The net release of uncertain tax position reserves, amounting to
approximately $31.0 million and $17.9 million for the 52-weeks ended
December 29, 2018 and December 30, 2017, respectively, have not been
included as pro forma adjustments in the above presentation of pro forma
income tax provision 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 52-Weeks Ended
December 29, December 30, December 29, December 30,
  2018       2017     2018       2017  
 
Net income (GAAP) $ 190,150 $ 142,550 $ 694,080 $ 709,007
Foreign currency gains / losses(1) 4,211 8,772 7,616 22,579
Tax effect of foreign currency gains / losses(2) (758 ) (1,799 ) (1,195 ) (4,712 )
Pro forma discrete tax items(3)         4,066           (157,414 )
Net income (Pro Forma) $ 193,603     $ 153,589   $ 700,501     $ 569,460  
 
Net income per share (GAAP):
Basic $ 1.01 $ 0.76 $ 3.68 $ 3.77
Diluted $ 1.00 $ 0.75 $ 3.66 $ 3.76
 
Net income per share (Pro Forma):
Basic $ 1.03 $ 0.82 $ 3.71 $ 3.03
Diluted $ 1.02 $ 0.81 $ 3.69 $ 3.02
 
Weighted average common shares outstanding:
Basic 188,878 187,607 188,635 187,828
Diluted 190,177 188,915 189,734 188,732
 
(1) The majority of the Company’s consolidated foreign currency
gains and losses are driven by movements in the Taiwan Dollar, Euro,
and British Pound Sterling 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 one of the Company’s subsidiaries. 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 effective tax rate of 18.0% and 15.7% for the
quarter and year-to-date ended December 29, 2018, respectively, and
a pro forma effective tax rate of 20.5% and 20.9% for the quarter
and year-to-date ended December 30, 2017, respectively.
(3) The discrete tax items are discussed in the pro forma effective
tax rate section above.
 

Contacts

Investor Relations Contact:
Teri Seck
913/397-8200
investor.relations@garmin.com

Media Relations Contact:
Carly Hysell
913/397-8200
media.relations@garmin.com

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