“Our strong year continued in the third quarter of 2016, reporting solid results with four of our five business segments delivering double digit sales growth and increased profitability,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “We are excited to see the continued positive customer reception of our fitness and outdoor wearables. Aviation and marine also achieved impressive double-digit growth on strong product offerings. We are maintaining our focus on innovation, diversification and market expansion to drive further growth opportunities in all business segments. Given the strong revenue and margin performance in the third quarter, we are raising our revenue and EPS guidance for the full year.”
Fitness:
The fitness segment posted strong revenue growth of 32% in the quarter driven by wrist heart rate wearable devices and cycling. Gross margin increased year-over-year to 55%, while operating margin improved to 24% resulting in a 68% growth in operating income. During the quarter, we began shipping both the recently announced Forerunner® 35, bringing Garmin ElevateTM wrist based heart rate technology to an affordable, sleek, easy-to-use GPS device, and vívofit® jr., our first kid inspired activity tracker featuring a comfortable design, one+ year battery life and a parent controlled mobile app created to help motivate kids to stay active.
Outdoor:
The outdoor segment achieved strong revenue growth of 28% driven primarily by wearable devices. Gross margin increased year-over-year to 63%, while operating margin improved to 35% resulting in a 32% increase in operating income. We recently launched our fēnix® Chronos line, crafted from premium jeweler’s grade materials to suit every style without sacrificing the rugged multisport capabilities customers have come to recognize within our fēnix line.
Marine:
The marine segment posted solid third quarter revenue growth of 12% driven by our strong lineup of chart plotters, fish finders, and entertainment systems. Gross margin increased year-over-year to 57%, while operating margin improved to 15% resulting in operating income growth of 80%. For the second year in a row Garmin was recognized as the Manufacturer of the Year by the NMEA (National Marine Electronics Association), winning awards across a broad range of product categories. Garmin also received the prestigious IBEX award in the OEM Electronics category with our well received, FantomTM marine radar series.
Aviation:
The aviation segment posted solid revenue growth of 14% in the quarter despite ongoing softness in the overall aviation market. Our performance was driven by growth in both OEM and Aftermarket sales, which was led by demand for Automatic Dependent Surveillance Broadcast (ADS-B) systems. Gross margin was 75% and operating margin improved to 28%, resulting in operating income growth of 28%. During the quarter, we received certification and made our first delivery of the G5000TM integrated flight deck for the Beechjet 400A/Hawker 400XP aircraft.
Auto:
The auto segment recorded revenue decline of 21%, primarily due to the ongoing PND market contraction and headwinds caused by additional revenue deferrals associated with certain auto OEM products. Gross margin improved to 44%, and operating margin was consistent year-over-year at 12%. During the quarter, we launched the VIRB® Ultra 30, an ultra HD 4K/30fps action camera, built ready for adventure with voice control, a LCD color touchscreen and high precision sensors and GPS.
Additional Financial Information:
Total operating expenses in the quarter were $246 million, a 4% increase from the prior year. Research and development investment increased 10%, with growth primarily focused on aviation and our active lifestyle products in fitness and outdoor. Advertising decreased 11%, driven primarily by year-over-year decreases in auto. Selling, general and administrative expense increased 3%, but improved as a percent of sales.
The effective tax rate in the third quarter of 2016 was 16.5%, down from 27.6% in the prior year quarter. The decrease in the effective tax rate is primarily due to projected income mix by jurisdiction compared to the prior year.
In the third quarter 2016, we generated $199 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 $96 million and our share repurchase activity, which totaled approximately $20 million in the third quarter. We have approximately $103 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 approximately $2.4 billion.
2016 Guidance:
Based on our performance in the first three quarters of 2016, we are
updating our full year guidance. We now anticipate revenue of
approximately $2.95 billion, driven primarily by a stronger outlook for
all of our segments except auto. We anticipate our full year pro forma
EPS will be approximately $2.65 based on gross margin of approximately
55%, operating income of approximately $580 million and a full year
effective tax rate of approximately 18.5% (see below details on
forward-looking pro forma EPS).
