Garmin Reports Third Quarter 2015 Results and Affirms Updated Guidance

Garmin Ltd. (Nasdaq: GRMN – News) today announced results for the quarter ended September 26, 2015.

Summary items for the quarter and recent product announcements include:

• Total revenue of $680 million in the third quarter of 2015 with fitness, outdoor, aviation and marine delivering 61% of total revenue
• The relative strength of the US Dollar compared to other major currencies negatively impacted revenue by approximately $52 million, or 7%, in the third quarter of 2015
• Gross and operating margins were 53% and 18.5%, respectively; gross margin was impacted by geographic revenue mix shifting toward countries with weaker currencies relative to the U.S. Dollar and lower average selling prices; operating margin was further impacted by strategic investments in R&D and advertising
• Shipped approximately 3.9 million units in the quarter, a 4% increase over the year ago quarter
• Pro forma EPS(1) of $0.51 for third quarter 2015
• Announced new products available for the fourth quarter including fitness and wellness devices incorporating Garmin Elevate™ wrist-based heart rate technology and the babyCam™ serving a new product category

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

“The global economic environment and intensified competitive landscape have challenged our ability to repeat the strong financial performance of 2014,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “However, we have a solid plan to improve our results over the long term. Our plan includes compelling new products, some of which have already launched in the fourth quarter with many more to come in 2016. We look forward to once again meeting the expectations of our investors and ourselves while creating long-term sustainable value.”

Fitness:

The fitness segment posted revenue growth of 23% in the quarter. The sequential acceleration in growth reflects the strength of wellness, multisport, and cycling product offerings. Gross margin fell to 54% in the quarter, while operating margin declined to 19%. The gross margin decline was driven by both the unfavorable currency movements and a competitive pricing environment for certain product categories. The operating margin decline further reflects ongoing investment in advertising to support our long-term goals in the segment. We continue to view these investments as appropriate given the sizeable opportunity that exists in the global fitness and wellness markets. We recently introduced a new line-up of Forerunner® products including the 230, 235 and 630. The Forerunner 235 is Garmin’s first product to incorporate Garmin Elevate wrist-based heart rate monitoring technology. The Forerunner 630 builds off our prior advanced running watches with the addition of new running metrics and physiological measurements. Each of the new devices are compatible with Connect IQ™, our smartwatch platform. Also new for the fourth quarter is the vívosmart® HR, offering wrist-based heart rate via Garmin Elevate, along with an always-on display, smart notifications and activity intensity levels. To support these products and many others, we recently launched an update to Garmin Connect Mobile. The update offers a new modern and colorful interface, the ability to customize based on individual needs and improved social capabilities.

Outdoor:

The outdoor segment posted a 5% revenue decline in the quarter, due to geographic exposure to weak currencies. Gross and operating margins within the segment were largely consistent with the prior quarter at 59% and 33%, respectively. On a year-over-year basis, unfavorable currency movements, along with pricing and category mix created downward pressure on gross margin. In addition, we continue to invest in research and development to expand our product portfolio and explore new market opportunities which impacts operating margin. While some outdoor categories have slowed, we continue to see opportunities for growth in existing and adjacent categories in 2016 through innovation and exploration.

Aviation:

The aviation segment posted a revenue decline of 5% in the third quarter of 2015 as the general aviation market has slowed throughout the year. The gross margin in aviation remains strong at 74%, while operating margin declined year-over-year to 25% due to growth in research and development to support future revenue opportunities. As reported last quarter, overall general aviation industry trends are difficult due to volatile global markets. In the first half of the year, we were able to report revenue growth as industry trends were offset by market share gains. These share gains give us confidence that our growing R&D investment will generate revenue growth opportunities when the industry stabilizes or begins to grow again.

Marine:

The marine segment posted flat revenue in the quarter as the boating season came to a close and we compared against our third quarter 2014 acquisition of Fusion Electronics. Gross margin improved year-over-year to 55% in the quarter as mix shifted toward new products with higher margin profiles partially offset by unfavorable currency movements. Operating margin was 9% in the quarter, consistent with the prior year. Garmin was recently honored as the Manufacturer of the Year by NMEA (National Marine Electronics Associations). In addition to this important honor from NMEA, Garmin also won four product-specific awards in the autopilot, MFD (multi-function display) and smartphone applications categories. These awards speak to the strength and breadth of our innovative marine product line.

Auto:

The auto segment posted a revenue decline of 14% in the third quarter as PND sales continued to decline and the contribution of amortization of previously deferred revenue fell as expected. Gross and operating margins in the quarter were 43% and 12%, respectively, declining from the prior year. The gross margin decline resulted primarily from unfavorable currency movements. We recently introduced babyCam, an in-vehicle video monitor that transmits video wirelessly from the back seat of a vehicle to a compatible Garmin PND. The babyCam features night vision technology so parents can view children at night or in low-light situations.

Additional Financial Information:

Total operating expenses in the quarter were $237 million, a 6% increase from the prior year. Research and development investment increased 7% with continued emphasis on aviation and active lifestyle products in fitness and outdoor. Advertising increased 11% driven primarily by media, point-of-sale presence, and cooperative spending with key retailers to support wearables growth. Selling, general and administrative expense increased by 4% driven primarily by information technology and product support costs.

The effective tax rate in the third quarter of 2015 was 27.7% compared to a pro forma effective tax rate of 21.0% in the prior year when excluding the impact of the $308 million income tax expense associated with our inter-company restructuring and a $24 million income tax benefit associated with net releases of reserves primarily associated with specific uncertain tax positions. The year-over-year rate increase negatively impacted earnings per share by $0.05. The increase in the effective tax rate resulted from the reduced income projection for 2015, which negatively impacts our geographic income mix.

We continued to return cash to shareholders with our quarterly dividend of approximately $97 million and our share repurchase activity which totaled $51 million in the third quarter. We have $192 million remaining in the share repurchase program authorized through December 31, 2016, and expect to repurchase as conditions warrant. We ended the quarter with cash and marketable securities of over $2.4 billion.

2015 Guidance:

As pre-announced, Garmin expects revenue of approximately $2.8 billion, down from the previous guidance of $2.9 billion. We expect full year fitness growth to be approximately 15% in consideration of the year-to-date results, the dynamics of the market, and in recognition that the strong growth of fourth quarter 2014 will be more challenging to repeat this year. We expect aviation revenue to be flat for the year due to recent weakness in the general aviation industry. Outdoor revenue is now expected to be weaker than previously forecast at a decline of approximately 4%. Auto and marine revenue assumptions remain in place. Total company gross margin is expected to be approximately 53.5%. In light of the revised revenue and margin outlook, Garmin expects an operating margin of approximately 18.5%. Our full year tax rate is expected to increase to 21.5% due to an unfavorable mix of profits by taxing jurisdiction. The result of these changes is expected pro forma EPS of approximately $2.25.

Webcast Information/Forward-Looking Statements:

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

When: Wednesday, October 28, 2015 at 10:30 a.m. Eastern
Where: http://www.garmin.com/aboutGarmin/invRelations/irCalendar.html
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 December 30, 2015 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 revenue for fiscal 2015, the Company’s expected segment revenue growth rates, margins, currency movements, expenses, pricing, new products to be introduced in 2015 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 27, 2014 filed by Garmin with the Securities and Exchange Commission (Commission file number 0-31983). A copy of Garmin’s 2014 Form 10-K can be downloaded from http://www.garmin.com/aboutGarmin/invRelations/finReports.html.

Garmin, Forerunner and vívosmart, are registered trademarks and Elevate, babyCam, and Connect IQ 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.

Non-GAAP Financial Information

Pro Forma net income (earnings) per share

Management believes that net income per share before the impact of foreign currency translation gain or loss and income tax adjustments that materially impact the effective tax rate, as discussed below, is an important measure. The majority of the Company’s consolidated foreign currency gain or loss result from balances involving the Euro, the British Pound Sterling and the Taiwan Dollar and from the exchange rate impact of the significant cash and marketable securities, 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 effecting prior periods. Thus, reported income tax expense is not reflective of the income tax expense that is incurred related to the current period earnings. The net release of other uncertain tax position reserves, amounting to approximately $7 million and $11 million for the 39-weeks ended September 26, 2015 and September 27, 2014, 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 and are comparable between periods. In the third quarter of 2014, the company incurred tax expense of $308 million associated with our inter-company restructuring. As this is a one-time transaction and not reflective of income tax expense incurred related to the current period earnings, it has been excluded from pro forma net income (earnings) per share. 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 permits a consistent comparison of the Company’s operating performance between periods.

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 flow plus one-time cash payments associated with our inter-company restructuring less capital expenditures for property and equipment.

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