“We achieved strong results in the second quarter of 2016 with each business segment delivering solid performance,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “Fitness and outdoor achieved impressive revenue and profit growth driven by our strengthening position in the wearables market. Aviation and marine also delivered revenue and profit growth while auto remains a solid base of profit contributions to the overall business. I am pleased with our performance in the first half of 2016 which gives us confidence to raise our guidance for the full year.”
Fitness:
The fitness segment posted robust revenue growth of 34% in the quarter driven by wearable devices. Gross margin was consistent year-over-year at 56% while operating margin improved to 25% from 21% in the prior year. During the quarter, we began shipping the previously announced vivoactive® HR and vivofit® 3 activity trackers as well as the Forerunner® 735XT, a lightweight multi-sport-capable running watch, the vivosmart® HR +, our smart activity tracker with GPS, and vivomoveTM, a fashionable analog watch with activity tracking features and a one year battery life.
Outdoor:
The outdoor segment posted robust revenue growth of 23% driven by wearable devices and a full quarter contribution of our recently acquired DeLorme products. Gross and operating margin was 64% and 36% respectively, an improvement over a year ago resulting in a 31% increase in operating income. Our recently introduced Approach® X40 began shipping late in the quarter and is generating positive customer response by bringing golf specific features to an activity tracker band. Also, we recently broadened our handheld product line with the introduction of the Oregon® 700 series of handheld GPS units featuring a redesigned GPS antenna, smart notifications and automatic uploads.
Marine:
The marine segment posted solid second quarter revenue growth of 8% driven by our strong lineup of chart plotters, fish finders, and entertainment systems. Growth was driven by market share gains in the inland fishing category. Gross margins increased year-over-year to 58% while operating margin increased to 26% resulting in operating income growth of 19%.
Aviation:
The aviation segment posted revenue growth of 6% in the quarter despite ongoing softness in the overall aviation market. Our solid performance was driven by growth in OEM sales as well as Automatic Dependent Surveillance Broadcast (ADS-B) systems. Both the gross margin and operating margin were strong at 74% and 28%, respectively, and improved compared to the year ago quarter resulting in a 13% increase in operating income.
Auto:
The auto segment recorded revenue decline of 18% primarily due to the ongoing PND market contraction and headwinds caused by additional revenue deferrals associated with certain auto OEM products. Gross and operating margins improved to 46% and 16%, respectively. We continue to make inroads with automakers and have recently been recognized at the 2016 Beijing Auto Show as the factory-installed Original Equipment Digital Video Recorder (OE DVR) solution in the new Peugeot 3008.
Additional Financial Information:
Total operating expenses in the quarter were $262 million, a 4% increase from the prior year. Research and development investment increased 5%, with growth primarily focused on aviation and our active lifestyle products in fitness and outdoor. Advertising decreased 3%, driven primarily by year-over-year decreases in auto and marine, partially offset by increases in fitness and outdoor advertising to support wearables. Selling, general and administrative expense increased by 6%, and is relatively flat as a percent of sales.
The effective tax rate in the second quarter of 2016 was 21.0%, which is comparable to the effective tax rate of 20.6% in the prior year quarter.
In the second quarter 2016, we generated $135 million of free cash flow (see attached table for reconciliation of this non-GAAP measure). We continued to return cash to shareholders with our quarterly dividend of approximately $97 million and our share repurchase activity, which totaled more than $25 million in the second quarter. We have approximately $123 million remaining in the share repurchase program authorized through December 31, 2016, and expect to repurchase as business and market conditions warrant. We ended the quarter with cash and marketable securities of about $2.4 billion.
2016 Guidance:
Based on our performance in the first half of 2016, we are updating our full year guidance. We now anticipate revenue of approximately $2.9 billion driven primarily by a stronger outlook for our outdoor and fitness segments. We anticipate our full year EPS will be approximately $2.50 based on gross margin of about 55%, operating margin of about 19% and a full year effective tax rate of about 19.5%.
| 2016 Update | Prior | ||||
| Revenue | ~$2.9 B | ~$2.82 B | |||
| Gross Margin | ~55% | ~54.5% | |||
| Operating Income | ~550M | ~510M | |||
| Operating Margin | ~19% | ~18% | |||
| Tax Rate | ~19.5% | ~20.5% | |||
| Pro Forma EPS (3) | ~$2.50 | ~$2.25 | |||
| (3) See below details on forward-looking pro forma EPS | |||||
