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

SCHAFFHAUSEN, Switzerland--(BUSINESS WIRE)--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