Q3 2016 Earnings October 26, 2016 - Garmin International ...
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Q3 2016 Earnings October 26, 2016
Safe Harbor Statement These materials include projections and other forward-looking statements. These statements are based on the current expectations of Garmin Ltd. and are naturally subject to uncertainty and changes in circumstances. Forward-looking statements include, without limitation, statements containing words such as "proposed" and “intends” or “intended” and "expects" or "expected." Any statements regarding Garmin’s revenue, GAAP and pro forma estimated earnings and EPS, and tax rate for fiscal 2016, Garmin’s expected segment revenue growth rates, margins, currency movements, expenses, pricing, new products to be introduced in 2016 and Garmin’s plans and objectives are forward-looking statements. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. Other unknown or unpredictable factors could cause actual results to differ materially from those in the forward-looking statements. These factors include those discussed or identified in the filing by Garmin Ltd. with the U.S. Securities and Exchange Commission in its Annual Report on Form 10-K. Garmin Ltd. does not undertake any obligation to update publicly or revise forward-looking statements, whether as a result of new information, future events or otherwise, except to the extent legally required. 1
Business Update
Cliff Pemble
President and CEO
2
3rd Quarter Financial Review
Solid third quarter revenue, four of five segments attained
double digit sales and operating income growth
• Consolidated revenue of $722 million, up 6%
• Fitness, outdoor, marine and aviation segments combined grew 24%
and contributed 70% of total revenue
• Expanded gross margin and operating margin to 56.2% and 22.1%,
respectively
• Operating income growth of 27%
• GAAP EPS of $0.66 and pro forma EPS of $0.75
• Launched new product categories with the vívofit jr. and fēnix Chronos
3
Fitness 3rd Quarter Business Review • Revenue growth of 32% driven by strong demand for wearables • Gross and operating margin of 55% and 24%, respectively • Operating income growth of 68% Market/Product Update • Introduced and shipped our newest fitness wearables; Forerunner 35 and vívofit jr. • Partnered with Cerner to incorporate health and wellness data into their wellness and population health solutions 4
Outdoor 3rd Quarter Business Review • Revenue growth of 28% driven by strong demand for outdoor wearables • Gross margin and operating margin expanded to 63% and 35%, respectively • Operating income growth of 32% Market/Product Update • Launched the fēnix Chronos, adding luxury and more style to our popular multisport line of fēnix watches • Launched updated Rino 700 series, a rugged two-way radio 5
Marine
3rd Quarter Business Review
• Revenue growth of 12% with growth in
multiple product lines
• Gross margin and operating margin of
57% and 15%, respectively
• Operating income growth of 80%
Market/Product Update
• Honored with eight awards by NMEA
including Manufacturer of the Year
• Honored with IBEX Innovation award in
the OEM electronics category
6
Aviation
3rd Quarter Business Review
• Revenue growth of 14%
• Gross margin and operating margin
remain strong at 75% and 28%,
respectively
• Operating income growth of 28%
Market/Product Update
• Received final certification of the
G5000 equipped Beechjet 400A /
Hawker 400XP
• Announced the expansion of our
integrated flight deck to include a
G5000 modernization for the Citation
Excel and XLS
7
Auto 3rd Quarter Business Review • Revenue declined 21% ` • Gross margin expanded to 44% while operating margin remained consistent at 12% Market/Product Update • PND global market share continues to be strong • Launched VIRB Ultra, a HD 4K action camera 8
2016 Guidance Update
Updated Prior
Revenue ~ $2.95B ~ $2.9B
Gross Margin ~ 55% ~ 55%
Operating Income ~$580M ~$550M
Tax Rate ~ 18.5% ~ 19.5%
Pro Forma EPS ~ $2.65 ~ $2.50
92016 Revenue Guidance by Segment
Updated Prior
Growth Growth
Fitness ~22% ~20%
Outdoor ~24% ~20%
Marine ~13% ~10%
Aviation ~7% ~5%
Auto ~(17%) ~(17%)
Total ~5% ~3%
10Financial Update
Doug Boessen
CFO and Treasurer
11Q3 Income Statement
($ Millions) Q3 2016 Q3 2015 Change
Revenue $722 $680 6%
Gross Profit 406 362 12%
Gross Margin % 56.2% 53.3% 290 bps
Total Operating Expense 246 237 4%
Operating Income 160 125 28%
Operating Margin % 22.1% 18.5% 360 bps
Other Income/(Expense) (10) 39
Income Tax 25 46
Net Income (GAAP) 125 119 5%
Net Income Pro-Forma 141 97 45%
EPS (GAAP) $0.66 $0.63 5%
EPS Pro-Forma $0.75 $0.51 47%
Units Shipped (K) 3,848 3,861
12Q3 Revenue
Revenue by Segment
($ M) Q3 2016 Q3 2015 Change
Fitness $189 $143 32%
Outdoor 141 110 28%
Marine 70 63 12%
Aviation 107 94 14%
Auto 215 270 (21%)
Total $722 $680 6%
Action camera related net sales for the 13-weeks ended September 26, 2015 have been recast from the Outdoor segment to the Auto
segment to conform to the current year presentation.
13Q3 Revenue & Operating Income
Q3 2016 Revenue Q3 2016 Operating Income
10% 6% 16%
15% 30% 19%
19% 28%
31%
26%
Auto Fitness Outdoor Aviation Marine Auto Fitness Outdoor Aviation Marine
Q3 2015 Revenue Q3 2015 Operating Income
9% 5%
14% 19% 26%
40%
16%
29% 21%
21%
Auto Fitness Outdoor Aviation Marine Auto Fitness Outdoor Aviation Marine
14Operating Expenses
R&D ($M) Advertising ($M) SG&A ($M)
140 140 140
120 114 116 120 120
106 106 108 105 104
94 96 97
100 100 100
80 80 80
57
60 60 60
44
37 32 33
40 40 40
20 20 20
- - -
Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Q3 Q3 Q4 Q1 Q2 Q3
15 15 16 16 16 15 15 16 16 16 15 15 16 16 16
15Balance Sheet/Cash Flow/Taxes Balance Sheet • Ended quarter with approximately $2.4 billion of cash and marketable securities • Accounts receivable decreased sequentially due to seasonal trends but increased year-over-year on stronger sales • Inventory balance increased on a sequential basis as we prepared for the fourth quarter and remains higher year-over-year due to new product offerings Cash Flow • Generated $199 million of free cash flow in Q3 2016 • Repurchased approximately $20 million in company stock in Q3 2016 Taxes • Q3 2016 Effective Tax Rate (ETR) of 16.5% compared to 27.6% in Q3 2015 16
Q3 2016 Earnings October 26, 2016
Appendix
October 26, 2016
18Non-GAAP Financial Information
To supplement our financial results presented in accordance with GAAP, this presentation 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 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.
19Pro Forma Net Income (Earnings) Per Share
Management believes that net income per share before the impact of foreign currency gain or loss
and certain income tax adjustments, as discussed below, is an important measure. The majority of
the Company’s consolidated foreign currency gain or loss is typically driven by movements in the
Taiwan Dollar and the Euro 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 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
affecting prior periods. Thus, reported income tax expense is not reflective of the income tax
expense that is incurred related to the current period earnings. 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 permit a consistent comparison of the Company’s operating
performance between periods.
The net release of other uncertain tax position reserves, amounting to approximately $5.8 million
and $7.2 million for the 39-weeks ended September 24, 2016 and September 26, 2015,
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 or are comparable between periods. The tax effect of foreign currency gains (losses) was
calculated using effective tax rates of 16.5% and 27.6% for the third quarters of 2016 and 2015,
respectively and 18.8% and 21.9% for the year-to-date 2016 and 2015. The 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 both on a quarterly and year-to-date
basis.
20Net income per share (Pro Forma)
(in thousands, except per share information)
13-Weeks Ended 39-Weeks Ended
Sept 24, Sept 26, Sept 24, Sept 26,
2016 2015 2016 2015
Net Income (GAAP) $125,054 $119,299 $374,209 $323,844
Foreign currency gains (losses) 19,421 (30,573) 30,003 14,177
Tax effect of foreign currency gains (losses) (3,204) 8,453 (5,654) (3,104)
Net income (Pro Forma) $141,271 $97,179 $398,558 $334,917
Net income per share (GAAP):
Basic $0.66 $0.63 $1.98 $1.69
Diluted $0.66 $0.63 $1.98 $1.69
Net income per share (Pro Forma):
Basic $0.75 $0.51 $2.11 $1.75
Diluted $0.75 $0.51 $2.10 $1.75
Weighted average common shares outstanding:
Basic 188,692 190,342 189,027 191,068
DilutedNote:
(GAAP)Tax effects are based on respective periods’ normalized
189,238 190,822 effective tax rate.191,523
189,376
21Forward-looking Pro Forma Earnings Per Share
The Company has not provided a GAAP reconciliation for forward-looking pro forma earnings per
share because such measure cannot be provided without unreasonable efforts 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 $0.12 per share for the 39-weeks
ended September 24, 2016, as indicated above. No other pro forma income tax adjustments have
been included in forward-looking pro forma earnings per share.
22Free Cash Flow
Garmin Ltd. And Subsidiaries
Free Cash Flow
(in thousands)
13-Weeks Ended 39-Weeks Ended
Sept 24, Sept 26, Sept 24, Sept 26,
2016 2015 2016 2015
(in thousands)
Net cash provided by operating activities $212,993 $137,834 $492,365 $122,131
Less: purchases of property and equipment (13,543) (13,565) (42,157) (53,297)
Plus: taxes paid related to inter-company restructuring - - - 182,800
Free Cash Flow $199,450 $124,269 $450,208 $251,634
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 non-recurring cash payments associated with our
inter-company restructuring less capital expenditures for property and equipment.
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