Garmin Ltd. reduced its guidance for the year due to weakness seen in the third quarter in its fitness, aviation and outdoor segments.
Garmin expects to report third quarter 2015 revenue of approximately $680 million. It is estimated that currency movements negatively impacted sales by $52 million. On a year over year basis, fitness revenue is expected to grow approximately 23 percent in the quarter. Marine revenue is expected to be flat year over year after a seasonally strong second quarter. Garmin expects fitness growth to be offset by declines in the automotive segment as anticipated, and mid-single digit declines in outdoor and aviation, which were weaker than anticipated.
Garmin expects to report third quarter 2015 gross margin of approximately 53 percent. The year over year gross margin decline is driven by geographic revenue mix shifting toward countries with weaker currencies relative to the U.S. Dollar, and pricing dynamics, particularly in the fitness segment. Operating margin is expected to be approximately 18.5 percent as we continue to invest in research & development and advertising to capitalize on strategic growth opportunities in new markets. The current quarter tax rate is expected to be approximately 28 percent due to the full-year impact of the reduced income projection for 2015. The resulting third quarter GAAP diluted earnings per share (EPS) is expected to be approximately 63 cents a share. Excluding the impact of foreign currency translation gains, pro forma diluted EPS(1) is expected to be approximately 51 cents for the third quarter 2015.
“Given the global economic environment, revenue growth has proven difficult to generate in 2015, while gross margin has been weaker than our forecast due to geographic revenue mix and a competitive pricing environment in certain product categories,” said Cliff Pemble, president and chief executive officer (CEO) of Garmin Ltd. “While these dynamics have created challenges for our business, we remain confident in our plan to invest in advertising and research and development with an emphasis on new products and new markets that will deliver solid results for the long term.”
In light of the weaker than expected results through Q3, Garmin said it is revising its 2015 outlook.
For the full year, Garmin expects revenue of approximately $2.8 billion, down from the previous guidance of $2.9 billion. Garmin expects full year fitness growth to be approximately 15 percent, down from the previous guidance of 25 percent 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.
Garmin is also revising its outlook for aviation and now expects revenue for this segment to be flat for the year (vs. 5 percent growth previously) 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 percent. Auto and marine revenue assumptions remain in place.
Total company gross margin is expected to be approximately 53.5 percent. In light of the revised revenue and margin outlook, Garmin expects an operating margin of approximately 18.5 percent. Its full year tax rate is expected to increase to 21.5 percent due to an unfavorable mix of profits by taxing jurisdiction. Garmin now expects pro forma diluted EPS(1) of approximately $2.25 for full year 2015, compared to prior guidance of approximately $2.65. The pro forma diluted EPS guidance excludes the impact of the year-to-date gains and losses associated with translation of assets and liabilities held in non-functional currencies by our global subsidiaries as shown in the table below.
(1) Pro Forma EPS: 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 transactions 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 U.S. dollars at the end of each reporting period by the company’s various non-U.S. subsidiaries. Such gain or loss is required under GAAP because the functional currency of the subsidiaries differs from the currency in which various assets and liabilities are held. 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. 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.
