Garmin Reports Solid Fiscal 2017 Revenue and Operating Income Growth; Proposes Dividend Increase
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Garmin Reports Solid Fiscal 2017 Revenue and Operating Income Growth; Proposes Dividend Increase

SCHAFFHAUSEN, Switzerland — (BUSINESS WIRE) — February 21, 2018 — Garmin Ltd. (Nasdaq: GRMN) today announced results for the fourth quarter and fiscal year ended December 30, 2017.

Highlights for the fourth quarter 2017 include:

Highlights for the fiscal year 2017 include:

(in thousands,     13-Weeks Ended   14-Weeks Ended         52-weeks Ended   53-weeks Ended      
except per share data) December 30,   December 31,     Yr over Yr December 30,   December 31,     Yr over Yr
2017 2016     Change 2017 2016     Change
Net sales $ 888,496 $ 860,767 3 % $ 3,087,004 $ 3,018,665 2 %
Outdoor 203,278 175,397 16 % 698,867 546,326 28 %
Aviation 129,800 117,265 11 % 501,359 439,348 14 %
Marine 83,699 67,458 24 % 374,001 331,947 13 %
Fitness 276,195 274,052 1 % 762,194 818,486 -7 %
Auto 195,524 226,595 -14 % 750,583 882,558 -15 %
 
Gross margin % 56.2 % 54.7 % 57.8 % 55.6 %
 
Operating income % 20.2 % 18.6 % 21.7 % 20.7 %
 
GAAP diluted EPS $

0.73

$

0.72

2 % $ 3.68 $ 2.70 36 %
Pro forma diluted EPS (1) $

0.79

$

0.73

9 % $ 2.94 $ 2.83 4 %
 

(1) See attached table for reconciliation of non-GAAP measures including pro forma diluted EPS

 

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

“2017 was our second full year of sales and operating income growth driven by strong sales in our outdoor, aviation and marine segments,” said Cliff Pemble, president and chief executive officer of Garmin Ltd. “Entering 2018, we see additional growth opportunities ahead and we believe that we are well positioned to seize these opportunities with a strong lineup of products.”

Outdoor:

The outdoor segment grew 16% in the quarter with significant contributions from wearable devices combined with growth of inReach® subscription services. Gross and operating margins improved to 63% and 36%, respectively, resulting in 26% operating income growth. We expect outdoor to continue to be a growth segment in 2018 as we leverage opportunities in wearables and other product categories in the segment.

Aviation:

The aviation segment posted solid revenue growth of 11% in the quarter with growth contributions from both aftermarket and OEM. Gross and operating margins remained strong at 75% and 32%, respectively, resulting in 27% operating income growth. During the quarter, we delivered the 500th G1000® integrated flight deck upgrade for King Air aircraft, witnessed continued strength in our ADS-B offerings, and Textron Aviation announced our selection as the avionics provider for the Cessna Sky Courier 408. We continue to invest in upcoming certifications with our numerous OEM partners, as well as ongoing aftermarket opportunities for long-term market share gains.

Marine:

The marine segment posted strong fourth quarter revenue growth of 24% driven by our updated lineup of chartplotters and fishfinders, as well as contributions from our recently acquired Navionics product line. Gross margin improved to 55%. During the fourth quarter, we recorded a one-time accrual for a litigation settlement resulting in an operating loss in the marine segment of 13%. During the fourth quarter, we began shipping our new connected offerings in our popular ECHOMAP and STRIKER product lines enabling connectivity through our new ActiveCaptain™ mobile app. We expect marine to be a growth segment in 2018 as we focus on market share gains and new product innovations.

Fitness:

The fitness segment posted revenue growth of 1% in the quarter driven by our GPS enabled products, partially offset by declines in our basic activity trackers. Gross and operating margins increased to 53% and 21%, resulting in a 24% growth in operating income. Our recently announced Forerunner® 645 Music brings both music and Garmin Pay™ to a wearable with advanced features such as running dynamics and connectivity. We continue to see growth opportunities in our advanced wearables offset by declines in our basic activity trackers.

Auto:

The auto segment recorded revenue decline of 14% in the quarter, primarily due to the ongoing PND market contraction, partially offset by solid growth in OEM and niche categories. Gross margin declined to 41%, and operating margin was flat at 9%. At the recent Consumer Electronics Show, we announced our new OEM scalable infotainment platform with Amazon Alexa digital assistant integration. Looking forward, we are focused on disciplined execution to bring desired innovation to the market and to optimize profitability in this segment.

Additional Financial Information:

Total operating expenses in the quarter were $320 million, a 3% increase from the prior year. Research and development investment increased 3%, due to engineering personnel costs and the Navionics acquisition partially offset by the additional week of expense in 2016. Selling, general and administrative expenses increased 13%, due primarily to litigation related costs and the Navionics acquisition. Advertising decreased 13%, primarily due to lower media spend in the fitness segment.

The effective tax rate in the fourth quarter of 2017 was 23.1%. The pro forma effective tax rate in the fourth quarter of 2017 was 20.9% (see attached table for reconciliation of this non-GAAP measure), compared to an effective tax rate of 19.0% in the prior year quarter. The increase in the pro forma effective tax rate is primarily due to the Company’s election to align certain Switzerland corporate tax positions with evolving international tax initiatives and the impact of the release of reserves partially offset by income mix by tax jurisdiction.

In the fourth quarter of 2017, we generated $144 million of free cash flow (see attached table for reconciliation of this non-GAAP measure) and returned cash to our shareholders with our quarterly dividend of $96 million. We ended the quarter with cash and marketable securities of approximately $2.3 billion.

2018 Guidance:

We currently expect 2018 revenue of approximately $3.2 billion as growth in marine, outdoor and aviation is partially offset by ongoing declines in the PND market. We currently expect our full year pro forma EPS will be approximately $3.05 based upon gross margin of approximately 58.5%, operating margin of approximately 21% and a full year pro forma effective tax rate of approximately 19%.

            2018 Guidance(1)         Segment     Revenue Targets
Revenue ~$3.2 B Auto (1)     -17 %
Gross Margin ~58.5% Fitness 0 %
Operating Margin ~21% Aviation 13 %
Tax Rate (Pro Forma)(2) ~19% Outdoor 13 %
EPS (Pro Forma)(2) ~$3.05 Marine 18 %
       

(1)

 

Consolidated and Auto segment guidance assumes the adoption of the new revenue recognition standard in 2018 and restatement of 2017 amounts.

(2)

See attached table for reconciliation of non-GAAP measures including forward-looking pro forma tax rate and EPS

 

Effective in the first quarter 2018, the Company adopted Accounting Standards Codification (ASC) Topic 606, the new revenue recognition standard. The 2018 revenue and segment revenue growth percentages are based upon the restated 2017 revenue amounts. We have included additional appendices (Appendix A and B) with 2017 results reflecting the new revenue recognition standard to help investors understand the comparability of the 2018 guidance.

Dividend Recommendation:

The board of directors intends to recommend to the shareholders for approval at the annual meeting to be held on June 8, 2018, a cash dividend in the amount of $2.12 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 29, 2018 June 18, 2018 $0.53
September 28, 2018 September 14, 2018 $0.53
December 31, 2018 December 14, 2018 $0.53
March 29, 2019 March 15, 2019 $0.53
 

In addition, the board of directors has established March 30, 2018 as the payment date and March 15, 2018 as the record date for the final dividend installment of $0.51 per share, per the prior approval at the 2017 annual shareholders’ meeting. The first, second and third payments of $0.51 per share were made on June 30, 2017, September 29, 2017, and December 29, 2017, respectively.

Webcast Information/Forward-Looking Statements:

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

    When:     Wednesday, February 21, 2018 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 28, 2019 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, currency movements, expenses, pricing, new products to be introduced in 2018, 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 30, 2017 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2017 Form 10-K can be downloaded from http://www.garmin.com/aboutGarmin/invRelations/finReports.html. Any forward-looking statements made in this release speak only as of the date of this release.

Non-GAAP Financial Measures

This release and the attachments also 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 this release or the attachments.

Garmin, the Garmin logo, the Garmin delta, fēnix, Forerunner, G1000, inReach and Navionics are registered trademarks of Garmin Ltd. or its subsidiaries and are registered in one or more countries, including the U.S.; Active Captain, Connect IQ, ECHOMAP, Garmin Pay, Garmin Speak and STRIKER are trademarks of Garmin Ltd. or one of 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   14-Weeks Ended 52-Weeks Ended   53-Weeks Ended
December 30, December 31, December 30, December 31,
2017   2016 2017   2016
Net sales $ 888,496 $ 860,767 $ 3,087,004 $ 3,018,665
 
Cost of goods sold   388,978     389,985     1,303,840     1,339,095  
 
Gross profit 499,518 470,782 1,783,164 1,679,570
 
Advertising expense 58,710 67,702 164,693 177,143
Selling, general and administrative expense 128,880 114,312 437,977 410,558
Research and development expense   132,552     128,952     511,634     467,960  
Total operating expense   320,142     310,966     1,114,304     1,055,661  
 
Operating income 179,376 159,816 668,860 623,909
 
Other income (expense):
Interest income 9,994 9,296 36,925 33,406
Foreign currency losses (8,772 ) (1,648 ) (22,579 ) (31,651 )
Other   (107 )   1,093     (912 )   4,006  
Total other income (expense)   1,115     8,741     13,434     5,761  
 
Income before income taxes 180,491 168,557 682,294 629,670
 
Income tax provision (benefit)   41,711     31,952     (12,661 )   118,856  
 
Net income $ 138,780   $ 136,605   $ 694,955   $ 510,814  
 
Net income per share:
Basic $ 0.74 $ 0.73 $ 3.70 $ 2.71
Diluted $ 0.73 $ 0.72 $ 3.68 $ 2.70
 

Weighted average common shares outstanding:

Basic 187,607 188,233 187,828 188,818
Diluted 188,915 189,171 188,732 189,343
 
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share information)
           
(Unaudited)    
December 30, December 31,
2017     2016
Assets
Current assets:
Cash and cash equivalents $ 891,488 $ 846,883
Marketable securities 161,687 266,952
Accounts receivable, net 590,882 527,062
Inventories, net 517,644 484,821
Deferred costs 48,312 47,395
Prepaid expenses and other current assets   153,912     89,903  
Total current assets 2,363,925 2,263,016
 
Property and equipment, net 595,684 482,878
 
Marketable securities 1,260,033 1,213,285
Restricted cash 271 113
Deferred income taxes 199,343 110,293
Noncurrent deferred costs 73,851 56,151
Intangible assets, net 409,801 305,002
Other assets   107,352     94,395  
Total assets $ 5,010,260   $ 4,525,133  
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 169,640 $ 172,404
Salaries and benefits payable 102,802 88,818
Accrued warranty costs 36,827 37,233
Accrued sales program costs 93,250 80,953
Deferred revenue 139,681 146,564
Accrued royalty costs 32,204 36,523
Accrued advertising expense 30,987 37,440
Other accrued expenses 93,652 70,469
Income taxes payable 33,638 16,163
Dividend payable   95,975     96,168  
Total current liabilities 828,656 782,735
 
Deferred income taxes 75,215 61,220
Noncurrent income taxes 138,295 121,174
Noncurrent deferred revenue 163,840 140,407
Other liabilities 1,788 1,594
 
Stockholders' equity:

 

Shares, CHF 0.10 par value, 198,077 shares authorized and issued; 188,189 shares outstanding at December 30, 2017 and 188,565 shares outstanding at December 31, 2016

17,979 17,979
Additional paid-in capital 1,828,386 1,836,047
Treasury stock (468,818 ) (455,964 )
Retained earnings 2,368,874 2,056,702
Accumulated other comprehensive income (loss)   56,045     (36,761 )
Total stockholders' equity   3,802,466     3,418,003  
Total liabilities and stockholders' equity $ 5,010,260   $ 4,525,133  
 
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In thousands)
    52-Weeks Ended     53-Weeks Ended
December 30,     December 31,
2017 2016
Operating activities:
Net income $ 694,955 $ 510,814
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 59,895 55,796
Amortization 26,357 30,544
Gain on sale or disposal of property and equipment (230 ) (503 )
Provision for doubtful accounts 1,021 4,136
Deferred income taxes (90,725 ) 1,699
Unrealized foreign currency loss 21,036 13,387
Provision for obsolete and slow moving inventories 31,071 26,458
Stock compensation 44,735 41,250
Realized losses (gains) on marketable securities 991 (822 )
Changes in operating assets and liabilities:
Accounts receivable (40,088 ) 9,000
Inventories (38,575 ) (2,455 )
Other current and non-current assets (21,608 ) 2,234
Accounts payable (17,240 ) (11,496 )
Other current and non-current liabilities 5,627 44,766
Deferred revenue 15,329 (6,363 )
Deferred costs (18,266 ) (15,780 )
Income taxes payable   (13,443 )   3,017  
Net cash provided by operating activities 660,842 705,682
 
Investing activities:
Purchases of property and equipment (139,696 ) (90,960 )
Proceeds from sale of property and equipment 361 676
Purchase of intangible assets (12,232 ) (5,715 )
Purchase of marketable securities (587,656 ) (905,089 )
Redemption of marketable securities 635,311 957,350
Change in restricted cash (153 ) 146
Acquisitions, net of cash acquired   (90,471 )   (77,945 )
Net cash used in investing activities (194,536 ) (121,537 )
 
Financing activities:
Dividends (382,976 ) (481,452 )
Purchase of treasury stock under share repurchase plan (74,523 ) (93,233 )
Purchase of treasury stock related to equity awards (12,773 ) (7,331 )
Proceeds from issuance of treasury stock related to equity awards 21,860 18,648
Tax benefit from issuance of equity awards   -     1,692  
Net cash used in financing activities (448,412 ) (561,676 )
 
Effect of exchange rate changes on cash and cash equivalents 26,711 (8,656 )
   
Net increase in cash and cash equivalents 44,605 13,813
Cash and cash equivalents at beginning of period   846,883     833,070  
Cash and cash equivalents at end of period $ 891,488   $ 846,883  
 
 
Garmin Ltd. And Subsidiaries
Net Sales, Gross Profit, and Operating Income by Segment (Unaudited)
 
    Reportable Segments
         
Outdoor Fitness Marine Auto Aviation Total
 
13-Weeks Ended December 30, 2017
 
Net sales $ 203,278 $ 276,195 $ 83,699 $ 195,524 $ 129,800 $ 888,496
Gross profit 128,952 146,622 45,902 80,990 97,052 499,518
Operating income 73,322 57,315 (10,533 ) 17,401 41,871 179,376
 
14-Weeks Ended December 31, 2016
 
Net sales $ 175,397 $ 274,052 $ 67,458 $ 226,595 $ 117,265 $ 860,767
Gross profit 107,852 141,742 35,155 95,977 90,056 470,782
Operating income 58,314 46,175 2,995 19,363 32,969 159,816
 
52-Weeks Ended December 30, 2017
 
Net sales $ 698,867 $ 762,194 $ 374,001 $ 750,583 $ 501,359 $ 3,087,004
Gross profit 448,410 422,636 212,592 327,921 371,605 1,783,164
Operating income 249,867 146,765 50,328 67,967 153,933 668,860
 
53-Weeks Ended December 31, 2016
 
Net sales $ 546,326 $ 818,486 $ 331,947 $ 882,558 $ 439,348 $ 3,018,665
Gross profit 340,504 437,205 183,709 388,747 329,405 1,679,570
Operating income 184,035 160,596 52,167 102,347 124,764 623,909
 
 
Garmin Ltd. And Subsidiaries
Net Sales by Geography (Unaudited)
(In thousands)
 
    13-Weeks Ended   14-Weeks Ended       52-weeks Ended   53-weeks Ended    
December 30,   December 31,   Yr over Yr December 30,   December 31,   Yr over Yr
2017 2016   Change 2017 2016   Change
Net sales $ 888,496 $ 860,767 3 % $ 3,087,004 $ 3,018,665 2 %
Americas 426,374 445,324 -4 % 1,475,661 1,518,934 -3 %
EMEA 341,029 302,977 13 % 1,175,155 1,113,182 6 %
APAC 121,093 112,466 8 % 436,188 386,549 13 %
 
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, forward-looking pro forma earnings per share, pro forma effective tax rate, forward-looking 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 such discrete tax items are important measures to permit investors' consistent comparison between periods. In fiscal 2016, 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) $ 41,711 23.1 % $ (12,661 ) (1.9 %)
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) $ 37,645       20.9 % $ 144,753       21.2 %

(1)

 

Effective tax rate is calculated by taking the Income tax provision (benefit) 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, and affects period-to-period comparability, it has been identified as a pro forma adjustment.

 

The net release of uncertain tax position reserves, amounting to approximately $17.9 million and $11.9 million for the 52-weeks and 53-weeks ended December 30, 2017 and December 31, 2016, 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   14-Weeks Ended     52-weeks Ended   53-weeks Ended
December 30,   December 31, December 30,   December 31,
2017   2016 2017   2016
 
Net income (GAAP) $ 138,780 $ 136,605 $ 694,955 $ 510,814
Foreign currency losses(1) 8,772 1,648 22,579 31,651
Tax effect of foreign currency losses(2) (1,829 ) (312 ) (4,791 ) (5,974 )
Discrete tax items(3)   4,066       -     (157,414 )     -  
Net income (Pro Forma) $ 149,789     $ 137,941   $ 555,329     $ 536,491  
 
Net income per share (GAAP):
Basic $ 0.74 $ 0.73 $ 3.70 $ 2.71
Diluted $ 0.73 $ 0.72 $ 3.68 $ 2.70
 
Net income per share (Pro Forma):
Basic $ 0.80 $ 0.73 $ 2.96 $ 2.84
Diluted $ 0.79 $ 0.73 $ 2.94 $ 2.83
 
Weighted average common shares outstanding:
Basic 187,607 188,233 187,828 188,818
Diluted 188,915 189,171 188,732 189,343

(1)

 

The majority of the Company’s consolidated foreign currency 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 losses.

 

(2)

The tax effect of foreign currency losses was calculated using the pro forma effective tax rate of 20.9% for the quarter and 21.2% for the fiscal year ended December 30, 2017, respectively, and an effective tax rate of 19.0% for the quarter and 18.9% for the fiscal year ended December 31, 2016, respectively.

 

(3)

The discrete tax items are discussed in the pro forma effective tax rate section.

 

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 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 cash provided by operating activities.

Garmin Ltd. And Subsidiaries
Free Cash Flow
(in thousands)
 
    13-Weeks Ended   14-Weeks Ended     52-weeks Ended   53-weeks Ended
December 30,   December 31,     December 30,   December 31,
2017   2016 2017   2016
 
Net cash provided by operating activities $ 198,265 $ 213,315 $ 660,842 $ 705,682
Less: purchases of property and equipment   (54,484 )     (48,803 )   (139,696 )     (90,960 )
Free Cash Flow $ 143,781     $ 164,512   $ 521,146     $ 614,722  
 

Forward-looking pro forma tax rate

Forward-looking pro forma tax rate and pro forma earnings per share are calculated before the effect of certain discrete tax items. Management believes certain discrete tax items may not be reflective of income tax expense incurred as a result of current period earnings. Therefore, in order to permit consistent comparison between periods, the tax rate and earnings per share before the effect of such discrete tax items are important measures. In the 52-weeks ended December 30, 2017, such discrete tax items were recognized on a U.S. GAAP-basis that would have affected comparability between periods and were therefore removed from the pro forma tax rate. However, at this time management is unable to determine whether or not significant discrete tax items will be identified in fiscal 2018.

Forward-looking pro forma earnings per share (EPS)

Our 2018 pro forma EPS excludes foreign currency exchange gains and losses. The estimated impact of such 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 of such foreign currency gains and losses, net of tax effects, was $0.04 and $0.09 per share for the 13-weeks and 52-weeks ended December 30, 2017, respectively.

Appendix A – Fiscal 2018 revenue recognition accounting change

The following appendices present 2017 results restated to reflect Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers. These appendices provide comparable information to help investors understand the 2018 guidance.

We adopted ASC Topic 606, Revenue from Contracts with Customers (“ASC Topic 606”), the new revenue recognition standard, in the first quarter of 2018, effective for Garmin’s fiscal year ending December 29, 2018. ASC Topic 606 replaces existing revenue recognition rules with a comprehensive revenue measurement and recognition standard.

Adoption approach

The Company has adopted the new revenue recognition standard utilizing the full retrospective method. Under this method, the new recognition standard is applied to each prior period reported in the forthcoming 2018 Form 10-Q and Form 10-K filings. This adoption approach enhances comparability, as all periods presented in the forthcoming filings are reported under the new standard. We have provided relevant information below to highlight the financial impact of the new revenue recognition standard, and have also provided relevant restated financial statements under ASC Topic 606 in the following appendix.

ASC Topic 606 impacts

Based on our evaluation of the new revenue standard, Garmin’s recognition will be consistent with our previous accounting policies except for two impacts, both of which are within the Company’s auto segment:

Both changes noted above accelerate the timing of revenue recognition. See below for an overview of the financial impact to the Company’s results of operations:

   

FY 16

 

FY 17

(USD in millions) Reported   Restated(1)   Impact(2) Reported   Restated(1)   Impact(2)
Revenue - Consolidated $3,019   $3,046   $27 $3,087   $3,122   $35
Revenue - Auto segment   883   910   27   751   785   35
Operating Income - Consolidated 624 633 9 669 684 15
Operating Income - Auto segment 102 111 9 68 83 15

(1)

 

Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The results above are restated under ASC Topic 606, and are included for comparability to 2018 earnings guidance.

 

(2)

This row may not cross-foot as figures are rounded to the nearest million.

 

The Company’s historical net cash flows provided by or used in operating, investing, and financing activities are not impacted by adoption of the new revenue standard.

Within Appendix A and Appendix B, the references to periods such as “FY 17,” “Q1 17,” or “2017,” refer to the corresponding periods or period-end dates as reported in the applicable Form 10-K or Form 10-Q filings. See additional restated financial information below within Appendix B.

APPENDIX B – Restated financial information under ASC Topic 606

Garmin Ltd. And Subsidiaries
Condensed Consolidated Statements of Income (Unaudited)
(In thousands)
   
Previously Reported
         
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
 
Net sales $3,018,665 $638,546 $816,885 $743,077 $888,496 $3,087,004
 
Cost of goods sold 1,339,095 266,423     339,027   309,412   388,978 1,303,840  
 
Gross profit 1,679,570 372,123 477,858 433,665 499,518 1,783,164
 
Total operating expense 1,055,661 255,778     274,508   263,875   320,142 1,114,304  
 
Operating income 623,909 116,345 203,350 169,790 179,376 668,860
 
Total other income (expense) 5,761 (28,653 )   24,705   16,266   1,115 13,434  
 
Income before income taxes 629,670 87,692 228,055 186,056 180,491 682,294
 
Income tax provision (benefit) 118,856 (150,120 )   57,105   38,643   41,711 (12,661 )
 
Net income $510,814 $237,812     $170,950   $147,413   $138,780 $694,955  
 
 
Restated(1)
 
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
 
Net sales $3,045,796 $641,510 $831,486 $751,245 $897,319 $3,121,560
 
Cost of goods sold 1,357,271 268,704     347,356   313,722   393,837 1,323,619  
 
Gross profit 1,688,525 372,806 484,130 437,523 503,482 1,797,941
.
Total operating expense 1,055,661 255,778     274,508   263,875   320,142 1,114,304  
 
Operating income 632,864 117,028 209,622 173,648 183,340 683,637
 
Total other income (expense) 5,761 (28,653 )   24,705   16,266   1,115 13,434  
 
Income before income taxes 638,625 88,375 234,327 189,914 184,455 697,071
 
Income tax provision (benefit) 122,890 (149,519 )   58,699   39,935   42,983 (7,902 )
 
Net income $515,735 $237,894     $175,628   $149,979   $141,472 $704,973  
 
 
Impact
 
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
 
Net sales $27,131 $2,964 $14,601 $8,168 $8,823 $34,556
 
Cost of goods sold 18,176 2,281     8,329   4,310   4,859 19,779  
 
Gross profit 8,955 683 6,272 3,858 3,964 14,777
 
Total operating expense - -     -   -   - -  
 
Operating income 8,955 683 6,272 3,858 3,964 14,777
 
Total other income (expense) - -     -   -   - -  
 
Income before income taxes 8,955 683 6,272 3,858 3,964 14,777
 
Income tax provision (benefit) 4,034 601     1,594   1,292   1,272 4,759  
 
Net income $4,921 $82     $4,678   $2,566   $2,692 $10,018  

(1)

  Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The results above are restated under ASC Topic 606.
 
 
Garmin Ltd. And Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(In thousands, except per share information)
                 
Previously Reported Restated(1) Impact
Assets 2016   2017 2016   2017 2016   2017
Current assets:
Cash and cash equivalents $ 846,883 $ 891,488 $ 846,883 $ 891,488 $ - $ -
Marketable securities 266,952 161,687 266,952 161,687 - -
Accounts receivable, net 527,062 590,882 527,062 590,882 - -
Inventories, net 484,821 517,644 484,821 517,644 - -
Deferred costs 47,395 48,312 34,665 30,525 (12,730 ) (17,787 )
Prepaid expenses and other current assets   89,903     153,912     89,903     153,912     -     -  
Total current assets 2,263,016 2,363,925 2,250,286 2,346,138 (12,730 ) (17,787 )
 
Property and equipment, net 482,878 595,684 482,878 595,684 - -
 
Marketable securities 1,213,285 1,260,033 1,213,285 1,260,033 - -
Restricted cash 113 271 113 271 - -
Deferred income tax 110,293 199,343 105,668 189,959 (4,625 ) (9,384 )
Noncurrent deferred costs 56,151 73,851 30,934 33,029 (25,217 ) (40,822 )
Intangible assets, net 305,002 409,801 305,002 409,801 - -
Other assets   94,395     107,352     94,395     107,352     -     -  
Total assets $ 4,525,133   $ 5,010,260   $ 4,482,561   $ 4,942,267   $ (42,572 ) $ (67,993 )
 
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 172,404 $ 169,640 $ 172,404 $ 169,640 $ - $ -
Salaries and benefits payable 88,818 102,802 88,818 102,802 - -
Accrued warranty costs 37,233 36,827 37,233 36,827 - -
Accrued sales program costs 80,953 93,250 80,953 93,250 - -
Deferred revenue 146,564 139,681 118,496 103,140 (28,068 ) (36,541 )
Accrued royalty costs 36,523 32,204 36,523 32,204 - -
Accrued advertising expense 37,440 30,987 37,440 30,987 - -
Other accrued expenses 70,469 93,652 70,469 93,652 - -
Income taxes payable 16,163 33,638 16,163 33,638 - -
Dividend payable   96,168     95,975     96,168     95,975     -     -  
Total current liabilities 782,735 828,656 754,667 792,115 (28,068 ) (36,541 )
 
Deferred income taxes 61,220 75,215 62,617 76,612 1,397 1,397
Noncurrent income taxes 121,174 138,295 121,174 138,295 - -
Noncurrent deferred revenue 140,407 163,840 91,238 87,061 (49,169 ) (76,779 )
Other liabilities 1,594 1,788 1,594 1,788 - -
 
Stockholders' equity:
Shares, CHF 0.10 par value 17,979 17,979 17,979 17,979 - -
Additional paid-in capital 1,836,047 1,828,386 1,836,047 1,828,386 - -
Treasury stock (455,964 ) (468,818 ) (455,964 ) (468,818 ) - -
Retained earnings 2,056,702 2,368,874 2,090,233 2,412,423 33,531 43,549
Accumulated other comprehensive income   (36,761 )   56,045     (37,024 )   56,428     (263 )   383  
Total stockholders' equity   3,418,003     3,802,466     3,451,271     3,846,397     33,268     43,931  
Total liabilities and stockholders' equity $ 4,525,133   $ 5,010,260   $ 4,482,561   $ 4,942,267   $ (42,572 ) $ (67,993 )

(1)

  Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The balances above are restated under ASC Topic 606.
 
 
Garmin Ltd. And Subsidiaries
Pro Forma Effective Tax Rate
(In thousands, except effective tax rate (ETR) information)
     
Previously Reported
         
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
Income before income taxes $ 629,670 $ 87,692 $ 228,055 $ 186,056 $ 180,491 $ 682,294
U.S. GAAP income tax provision (benefit)   118,856     (150,120 )     57,105       38,643       41,711     (12,661 )
U.S. GAAP ETR(2) 18.9% (171.2%) 25.0% 20.8% 23.1% (1.9%)
Pro forma discrete tax items(3):
Switzerland corporate tax election - 168,755 - - 11,279 180,034
Impact of share-based award expirations   -     -       (7,275 )     -       (15,345 )   (22,620 )
Total pro forma discrete tax items   -     168,755       (7,275 )     -       (4,066 )   157,414  
Pro Forma Income Tax Provision $ 118,856   $ 18,635     $ 49,830     $ 38,643     $ 37,644   $ 144,753  
Pro Forma ETR 18.9% 21.3% 21.9% 20.8% 20.9% 21.2%
 
Restated(1)
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
Income before income taxes $ 638,625 $ 88,375 $ 234,327 $ 189,914 $ 184,455 $ 697,071
U.S. GAAP income tax provision (benefit)   122,890     (149,519 )     58,699       39,935       42,983     (7,902 )
U.S. GAAP ETR(2) 19.2% (169.2%) 25.1% 21.0% 23.3% (1.1%)
Pro forma discrete tax items(3):
Switzerland corporate tax election - 168,755 - - 11,279 180,034
Impact of share-based award expirations   -     -       (7,275 )     -       (15,345 )   (22,620 )
Total pro forma discrete tax items   -     168,755       (7,275 )     -       (4,066 )   157,414  
Pro Forma Income Tax Provision $ 122,890   $ 19,236     $ 51,424     $ 39,935     $ 38,917   $ 149,512  
Pro Forma ETR   19.2%   21.8%     21.9%     21.0%     21.1%   21.4%

(1)

 

Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The results above are restated under ASC Topic 606.

 

(2)

Effective tax rate is calculated by taking the Income tax provision (benefit) divided by Income before taxes.

 

(3)

The discussion of the nature and purpose of discrete tax items identified for pro forma adjustments is located above in the "Non-GAAP Financial Information" section of this earnings release, under the heading "Pro forma effective tax rate."

 
 
Garmin Ltd. And Subsidiaries
Pro Forma Net Income (Earnings) Per Share
(in thousands, except per share information)
     
Previously Reported
FY 16   Q1 17   Q2 17   Q3 17   Q4 17   FY 17
 
Net income (GAAP) $510,814 $237,812 $170,950 $147,413 $138,780 $694,955
Foreign currency gains / losses(2) 31,651 37,497 (15,110 ) (8,579 ) 8,772 22,579
Tax effect of foreign currency gains / losses(3) (5,974 ) (7,969 ) 3,302 1,782 (1,829 ) (4,791 )
Discrete tax items(4) -   (168,755 )   7,275     -     4,066   (157,414 )
Net income (Pro Forma) $536,491   $98,585     $166,417     $140,616     $149,789   $555,329  
 
Diluted earnings per share (GAAP) $2.70 $1.26 $0.91 $0.78 $0.73 $3.68
 
Diluted earnings per share (Pro Forma) $2.83 $0.52 $0.88 $0.75 $0.79 $2.94
 
 
Restated(1)
FY 16 Q1 17 Q2 17 Q3 17 Q4 17 FY 17
 
Net income (GAAP) $515,735 $237,894 $175,628 $149,979 $141,472 $704,973
Foreign currency gains / losses(2) 31,651 37,497 (15,110 ) (8,579 ) 8,772 22,579
Tax effect of foreign currency gains / losses(3) (5,974 ) (7,969 ) 3,302 1,782 (1,829 ) (4,791 )
Discrete tax items(4) -   (168,755 )   7,275     -     4,066   (157,414 )
Net income (Pro Forma) $541,412   $98,667     $171,095     $143,182     $152,481   $565,347  
 
Diluted earnings per share (GAAP) $2.72 $1.26 $0.93 $0.80 $0.75 $3.74
 
Diluted earnings per share (Pro Forma) $2.86 $0.52 $0.91 $0.76 $0.81 $3.00

(1)

 

Effective for the fiscal year ending December 29, 2018, we have adopted ASC Topic 606. The results above are restated under ASC Topic 606.

 

(2)

The majority of the Company’s consolidated foreign currency gains and losses are typically 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.

 

(3)

The tax effect of foreign currency gains and losses is calculated using the pro forma ETR for the respective period, as presented above. The quarterly tax effects may not cross-foot to the annual tax effect due to quarterly variances in pro forma ETR.

 

(4)

The discrete tax items are discussed in the pro forma effective tax rate section.


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Garmin Ltd.
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Teri Seck, 913/397-8200
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or
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